Shares of Colgate-Palmolive (NYSE:CL) stumbled out of the gate this morning, as the consumer products giant warned that rising costs of raw materials, coupled with increased marketing spending, would weigh down second-half earnings. The firm slashed its outlook to $0.57 to $0.59 for each of the next two quarters, a significant drop from last year and about a dime below current estimates. Investors reacted harshly to the dim forecast, driving the stock 10% lower to a multiyear low of $48.38.
Lately, Colgate-Palmolive has been on the losing end of a fierce battle with rival Procter & Gamble (NYSE:PG) for dominance in the tooth-whitening business, as the company's Simply White product has surrendered market share to Crest Whitestrips and Crest Night Effects. Late last year, management conceded that its single-minded focus on the tooth-whitening market may have left other product lines vulnerable to competition.
While lowered guidance can hardly be construed as a positive sign, the principal reason for the revision should be kept in perspective. The reduced target is not the result of flagging sales, but rather ambitious marketing. Heavy commercial spending will defend Colgate-Palmolive's brands and counter competitive advances made by Procter & Gamble, Clorox (NYSE:CLX), Unilever (NYSE:UNL), and others.
According to CEO Reuben Mark, the advertising has resulted in "excellent market share increases with extraordinary toothpaste growth to an all-time market share record here in the U.S." Despite the ramped-up marketing efforts, and higher costs of packaging and raw materials, Colgate-Palmolive still expects to maintain last year's record 55% gross margins.
Colgate's consistency is worth noting, as the company has delivered 33 consecutive quarters of rising net income, earnings, and profit margins. Most of that bottom-line growth has come via cost-cutting initiatives, though, as sales have reached a plateau. North American revenues fell 2.5% last quarter, and overall sales have only grown at around a 3% clip over the past five years.
Today's selling pressure may have been overdone, as neither of the factors attributed to the shortfall are alarming. Raw material prices have been plaguing the entire industry for a while now, and an aggressive marketing response was essential to boost brand awareness and address increased competition in North America, Russia, India, China, and several other markets.
Furthermore, the company has been mired in a slump with respect to product innovation, and volume growth may hinge on marketing efforts. Still, the decision to loosen the corporate purse strings should have been made earlier, and today's announcement affirms that things may get worse before they get better.
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Fool contributor Nathan Slaughter loves Colgate's Irish Spring Soap, but he owns none of the companies mentioned.
