Colgate Earnings: Inflation Eats Away at Margins, but Brand Spending Propels Sales Growth

Wide-moat Colgate's gross margin fell 160 basis points to 56.9%, once again succumbing to higher raw material costs in the first quarter (a 770-basis-point strain), pressures that are unlikely to subside in the near term. Management suggested higher agricultural costs (key ingredients within its Hill's pet food) would lead to several hundred million dollars in incremental costs this year, even as logistics costs have moderated. Despite this, we surmise Colgate is prudently focused on extracting inefficiencies while surgically raising prices—the combination of which served as a 700-basis-point benefit to gross margin in the quarter (the private-label mix impact from its recent acquisition served as the remaining 90-basis-point drag).