Why Shares of Colgate-Palmolive Lost 14% in the First Half of 2018

What happened

Shares of consumer goods conglomerate Colgate-Palmolive Company (NYSE: CL) lost 14.1% in the first six months of 2018, according to data from S&P Global Market Intelligence.

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So what

Colgate-Palmolive, like other consumer packaged goods (CPG) companies, has experienced eroding sales recently as purchasing habits shift online and competition from small, upstart brands proliferates in both developed and emerging markets.

For example, in the first quarter of 2018, company revenue grew 6.5% to $4.0 billion; however, organic revenue, which adjusts for foreign currency effects and the effects of acquisitions, expanded by a mere 1.5% — below management and shareholder expectations.

Colgate-Palmolive is also struggling somewhat due to its diverse revenue composition. The company has a more balanced geographical representation than most U.S.-based multinationals: North American sales made up just 21% of total revenue last quarter. Thus, the organization has a bit more exposure to wide global trends. Management has blamed flat volume growth in emerging markets as a headwind against revenue this year.

Raising prices in emerging markets to combat this sluggish volume isn't easy at present. In Colgate-Palmolive's largest geographical segment, Latin America, brisk economic growth over the last four quarters has tampered the high inflation experienced in the region, thus curtailing the ability of CPGs to hike prices. For those who are interested, I've described this phenomenon in more detail recently in regards to competitor Unilever (NYSE: UL).


On a more positive note, Colgate-Palmolive has weathered cost headwinds such as rising freight transportation in the U.S. as well as higher global commodity prices better than many of its peers. The company's "Global Growth and Efficiency" productivity program has helped stabilize gross margin. In the first quarter of 2018, gross margin declined just 10 basis points against the first quarter of 2017, to 60.2%.

The company is also controlling its bottom line, as a disciplined approach to general and administrative expenses in the first quarter resulted in an improvement in operating margin of roughly 40 basis points, to 24.6%. Between the higher reported sales and cost control, Colgate-Palmolive booked a credible diluted earning per share increase of 12.5% last quarter, to $0.72.

Now what

Investors won't have to wait long to get a read on how the first half of the year has ended from an earnings perspective. Colgate-Palmolive is set to report second-quarter 2018 earnings next week, on July 27.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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