Company Reports

While concerns abound around consumers' financial health and ultimately their willingness to pay up for the essential goods in Colgate-Palmolive's portfolio, we think the firm is navigating the uncertain landscape astutely. Under the leadership of CEO Noel Wallace, the firm's strategic focus has centered on elevating research, development, and marketing spending (on its core mix, in adjacent categories, and throughout the digital realm) and responding to evolving consumer preferences more expeditiously, bringing products to market in just six to 12 months in some cases, down from 18-36 months historically. The prudence of this course is evident, as Colgate has chalked up 21 consecutive quarters at or above its 3%-5% long-term organic sales growth target. We attribute these results to a renewed focus on consumer-valued innovation, even that which comes with a higher price, as well as elevated brand spending; the company has spent almost 12% of sales on marketing on average the past four years, 120 basis points above the level directed in 2017-19.

Macro and geopolitical turmoil has failed to deter wide-moat Colgate, as evidenced by the whopping 10% organic sales growth posted in its first quarter, which came on top of similar marks a year ago. We attribute this performance to Colgate’s unwavering commitment to invest in consumer-valued innovation across price tiers supported by robust marketing spending, up 16% in the quarter to more than 13% of sales (versus an 11.5% average over the past five years). We don’t think the firm will veer from this course, with our forecast calling for 13% of sales to be directed toward research, development, and marketing annually on average. From our vantage point, this spending is essential in increasing the appeal of its brands with retailers and consumers. And the fruits of these efforts have manifest in building market share positions, with its global hold on the toothpaste and toothbrush categories now at 41.3% and 31.7%, respectively, each up 110 basis points versus last year.

While concerns abound around consumers' financial health and ultimately their willingness to pay up for the essential goods in Colgate-Palmolive's portfolio, we think the firm is navigating the uncertain landscape astutely. Under the leadership of CEO Noel Wallace, the firm's strategic focus has centered on elevating research, development, and marketing spending (on its core mix, in adjacent categories, and throughout the digital realm) and responding to evolving consumer preferences more expeditiously, bringing products to market in just 6-12 months in some cases, down from 18-36 months historically. The prudence of this course is evident, as Colgate has chalked up 20 consecutive quarters at or above its 3%-5% long-term organic sales growth target. We attribute these results to a renewed focus on consumer-valued innovation, even that which comes with a higher price, as well as elevated brand spending; the company has spent almost 12% of sales on marketing on average the past four years, 120 basis points above the level directed in 2017-19.

Despite facing muted levels of consumer spending around the world and geopolitical volatility, wide-moat Colgate evidenced its brand prowess in the fourth quarter, chalking up 7% organic sales growth (on top of 9% growth a year ago) and a 400-basis-point spike in gross margin to 59.6%. Impressively, Colgate was able to build on its already leading position in the global toothpaste aisle, with its market share expanding to 41% (as cited by the firm), up from around 40% a year ago. And even in its largest market, Latin America, where it generates nearly one quarter of its total sales base, Colgate drove a whopping 16.5% increase in organic sales on a near-balanced contribution from price (up 8.5%) and volume (8%). In our view, this gives credence to its stout brand positioning.

While concerns abound around consumers' financial health and ultimately their willingness to pay up for the essential goods in Colgate-Palmolive's portfolio, we think the firm is navigating the uncertain landscape astutely. Under the leadership of CEO Noel Wallace, the firm's strategic focus has centered on elevating research, development, and marketing spending (on its core mix, in adjacent categories, and throughout the digital realm) and responding to evolving consumer preferences more expeditiously, bringing products to market in just 6-12 months in some cases, down from 18-36 months historically. The prudence of this course is evident, as Colgate has chalked up 19 consecutive quarters at or above its 3%-5% long-term organic sales growth target. We attribute these results to a renewed focus on consumer-valued innovation, even that which comes with a higher price, as well as elevated brand spending; the company has spent almost 12% of sales on marketing on average the past three years, 110 basis points above the level directed in 2017-19.

Concerns abound around the financial health of the consumer and ultimately their willingness to pay up for the essential goods that make up Colgate's portfolio. But if third-quarter marks are a guide, we think recent resilience is still holding, with organic sales up 9% in the quarter (on top of 7% growth a year ago). In its largest market, Latin America, where Colgate derives nearly one fourth of its total sales, this was particularly striking, with organic sales up 15%, driven by a 9.5% jump in prices and a 5.5% increase in volumes.

Wide-moat Colgate has been unrelenting in its pursuit to blunt inflation’s wrath, the fruits of which manifested in an 80-basis-point bump in gross margin to 57.8% in the second quarter. But cost pressures (a 540-basis-point hit to gross margin) show little sign of abating (particularly agricultural commodities required for Hill’s pet food). As such, we expect Colgate will keep boosting prices (a 450-basis-point margin benefit) and extracting costs to rebuild profits and unearth funds to reinvest in its business.

While headwinds have abound from rampant cost inflation and a strangled global supply chain, we think Colgate-Palmolive is navigating the uncertain landscape quite astutely. Under the leadership of CEO Noel Wallace, the firm's strategic focus has centered on elevating research, development, and marketing spending (on its core mix, in adjacent categories, and throughout the digital realm) and responding to evolving consumer preferences more expeditiously (bringing products to market in just six to 12 months in some cases, down from 18-36 months historically). The prudence of this course has been evident as Colgate has chalked up 17 consecutive quarters at or above its 3%-5% long-term organic sales growth target. We attribute these results to the firm’s renewed focus on consumer-valued innovation, even that which comes with a higher price, as well as cultivating its fare with elevated brand spending (expending almost 12% of sales toward marketing on average the past three years, 110 basis points above the level directed in 2017-19).

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).

While Colgate’s fourth-quarter marks (including a lower gross margin) sent a chill through the market (shares down at a mid-single-digit percentage clip), we posit the reaction was overdone. Organic sales jumped 8.5%, as 12.5% higher prices offset a 4% downdraft in volumes (modest, in our view, relative to the pronounced price hike). And its dominant market share in global and U.S. toothpaste held near 40% and 35%, respectively, speaking to its pristine brand standing.

While headwinds abound stemming from rampant cost inflation and a strangled global supply chain, we think Colgate-Palmolive is navigating the uncertain landscape quite astutely. Under the leadership of CEO Noel Wallace, the firm's strategic focus has centered on elevating research, development, and marketing spending (on its core mix, in adjacent categories, and throughout the digital realm) and responding to evolving consumer preferences more expeditiously (bringing products to market in just six to 12 months in some cases, down from 18-36 months historically). The prudence of this course has been evident as Colgate has chalked up 15 consecutive quarters at or above its 3%-5% long-term organic sales growth target. We attribute these results to the firm’s renewed focus on consumer-valued innovation, even that which comes with a higher price, as well as cultivating its fare with elevated brand spending (expending nearly 12% of sales toward marketing in each of the past two years, 130 basis points above the level directed in 2017-19).

In our view, wide-moat Colgate-Palmolive’s third-quarter marks affirm that the company is astutely navigating choppy waters. Organic sales jumped 7% (reflecting an 11.5% bump from higher prices, partially offset by a 4.5% volume retreat), marking Colgate’s 15th consecutive period of underlying gains in line with or above its 3%-5% long-term aim. We think this is a testament to the company's strategic priority to invest behind its brands through consumer-valued innovation across price tiers and marketing, which is proving particularly crucial as consumers battle higher prices at grocery stores and gas stations amid rising interest rates. The fruits of these efforts are witnessed in Colgate's share of the global and North American toothpaste markets expanding to nearly 40% and 35%, respectively, on top of its already dominant standing.

While headwinds abound stemming from rampant cost inflation and a strangled global supply chain, we think Colgate-Palmolive is navigating the uncertain landscape quite astutely. Under the leadership of CEO Noel Wallace, the firm's strategic focus has centered on elevating research, development, and marketing spending (on its core mix, in adjacent categories, and throughout the digital realm) and responding to evolving consumer preferences more expeditiously (bringing products to market in just six to 12 months in some cases, down from 18-36 months historically). The prudence of this course has been evident as Colgate has chalked up 14 consecutive quarters at or above its 3%-5% long-term organic sales growth target. We attribute these results to the firm’s renewed focus on consumer-valued innovation, even that which comes with a higher price, as well as cultivating its fare with elevated brand spending (expending nearly 12% of sales toward marketing in each of the past two years, 130 basis points above the level directed in 2017-19).

We don’t expect to alter materially our $75 fair value estimate for wide-moat Colgate after digesting what we perceived as solid second-quarter numbers. Organic sales shot up 9% (almost entirely driven by increased prices) despite lapping 5% growth last year, marking its highest quarterly growth metric since the fourth quarter of 2008. We attribute this performance to the firm’s deliberate focus on innovating at the value and premium price tiers, while investing in marketing (more than 11% of sales in quarter) and digital capabilities. This manifested in improving share positions in global toothpaste and toothbrushes (to 39.6% and 31.3%, respectively) relative to the year-ago period, on top of its already dominant oral-care standing. And while we acknowledge the multiple facets (the grocery store, the gas station, and interest rates, among others) squeezing consumers' pocketbooks, we believe Colgate is uniquely positioned, as it is not just dependent on selling its wares at the shelf because of its entrenched relationships with industry professionals (dentists, veterinarians, and dermatologists) that should support continued growth irrespective of the macro climate.

While headwinds abound stemming from rampant cost inflation and a strangled global supply chain, we think Colgate-Palmolive is navigating the uncertain landscape quite astutely. Under the leadership of CEO Noel Wallace, the firm's strategic focus has centered on elevating research, development, and marketing spending (on its core mix, in adjacent categories, and throughout the digital realm) and responding to evolving consumer preferences more expeditiously (bringing products to market in just six to 12 months in some cases, down from 18-36 months historically). The prudence of this course has been evident as Colgate has chalked up 13 consecutive quarters of 3%-5% organic sales growth, in line with its long-term aims. We attribute these results to the firm’s renewed focus on consumer-valued innovation, even that which comes with a higher price, as well as cultivating its fare with elevated brand spending (expending nearly 12% of sales toward marketing in each of the past two years, 130 basis points above the level directed in 2017-19).

The burden of inflation and supply chain bottlenecks is widely understood, but the accelerating angst Colgate-Palmolive felt in the first quarter was striking. Adjusted gross margins sank 220 basis points to 58.5%, and management sliced its full-year outlook to reflect expectations for a more than 20% increase in material and logistics costs this year. It now expects adjusted EPS to be down midsingle digits from low- to mid-single-digit growth prior. One of the primary culprits was in fats and oils, which has historically been the second-largest cost bucket behind resins; the firm is now seeing a more than 60% increase this year in those categories.

While headwinds abound stemming from rampant cost inflation and a strangled global supply chain, we think Colgate-Palmolive is navigating the uncertain landscape quite astutely. With CEO Noel Wallace, the firm's strategic focus has centered on elevating research, development, and marketing spending (on its core mix, within adjacent categories, and throughout the digital realm) and responding to evolving consumer preferences more expeditiously (bringing products to market in just six to 12 months in some cases, down from 18-36 months historically). The prudence of this course has been evident as Colgate has chalked up 12 consecutive quarters of 3%-5% organic sales growth, in line with its long-term aims. We attribute these results to the firm’s renewed focus on consumer-valued innovation, even that which comes with a higher price, as well as cultivating its fare with elevated brand spending (expending nearly 12% of sales toward marketing in each of the past two years, 130 basis points above the level directed in 2017-19).

Supply chain disruptions and striking inflation (across raw materials, transportation, packaging, and labor) continue to wreak havoc, and wide-moat Colgate is not immune. However, using fiscal 2021 marks as a guide, we’d suggest its brand prowess and cost edge are helping it persevere. In this context, Colgate chalked up 4.5% underlying sales growth (on top of robust 7% growth a year ago), driven by higher prices (3.5%) and stepped-up volumes (1%). And despite a 120-basis-point retreat in gross and operating margins to 59.6% and 22.3%, respectively, we don’t ascribe to the belief that Colgate is cracking under the weight of outsize cost pressure.

While headwinds abound (stemming from rampant cost inflation and a strangled global supply chain), we think Colgate-Palmolive is navigating the uncertain landscape quite astutely. With CEO Noel Wallace at the helm, the firm's strategic focus has centered on elevating research, development, and marketing spending (on its core mix, within adjacent categories, and throughout the digital realm) and responding to evolving consumer preferences more expeditiously (bringing products to market in just six to 12 months in some cases, down from 18-36 months historically). The prudence of this course has been evident in that Colgate has chalked up 11 consecutive quarters of 3%-5% organic sales growth (in line with its long-term aims).

Despite extensive supply chain disruptions, we think Colgate’s enhanced focus on consumer-valued innovation across its price tiers contributed to impressive sales marks in the third quarter. Organic sales popped 4.5% (reflecting a 1.5% benefit from increased volumes and a 3-point bump from higher prices), on top of 7.5% growth in the year-ago period. This marked Colgate’s 11th consecutive period of underlying gains in line with or above its 3%-5% long-term aim.