Colgate's beat and raise fails to impress

Colgate-Palmolive (CL) posted solid Q3 2024 earnings, exceeding analyst expectations for both adjusted earnings per share (EPS) and revenue. The consumer goods giant reported an adjusted EPS of $0.91, outperforming the consensus estimate of $0.88 and marking a 6% year-over-year increase. Revenue also came in slightly ahead, with net sales reaching $5.03 billion, surpassing the expected $5.01 billion by a narrow margin. This modest revenue growth of 2.4% year-over-year reflected balanced gains from both volume and price increases, maintaining CL’s positive earnings momentum.

A key highlight in Colgate’s results was its strong organic sales growth, which climbed 6.8% year-over-year, outperforming expectations of a 6.35% increase. This growth underscores the strength of the brand’s core portfolio across various regions, although there were notable variances. In North America, organic sales unexpectedly declined by 1.9%, missing projections of a 2.08% gain, attributed to soft demand and potentially higher competitive pressures. Conversely, organic sales in Latin America surged by 14.2%, above the 13.2% expected, and Asia-Pacific saw a 6.1% increase, beating the 5.42% estimate. The company’s pet food brand, Hill's, performed well with a 6.5% rise in organic sales, outpacing its 4.21% target.

Colgate reported organic volume growth of 3.7%, also exceeding expectations of 3.09%. Latin America and Asia-Pacific led the volume gains, with Latin America volumes up 3.3%, above the 2.63% forecast, and Asia-Pacific rising 6.5%, against a 3.64% estimate. Hill's division also posted solid volume growth of 3.6%, surpassing the 1.45% forecast. North American volume, however, was softer, growing just 1.2% compared to the anticipated 4.09%, suggesting more subdued consumer demand or competitive headwinds in the region.

Pricing contributed meaningfully to Colgate's sales growth, rising by 3.1% overall, which was largely in line with the 3.28% estimate. The pricing strategies varied by region, with Latin America showing robust pricing power, up 10.9% year-over-year, ahead of the 10.1% forecast, reflecting higher inflation and pricing adjustments. However, pricing in North America decreased by 3.2%, a wider-than-expected decline from the 2.66% drop anticipated, signaling potential market pressures or promotional activity to maintain competitiveness.

Colgate’s gross margin was another strong point, expanding significantly year-over-year. Adjusted gross margin rose to 61.3% from 58.6%, beating the 60.7% estimate. Management attributed this improvement to favorable pricing adjustments, a focus on cost efficiencies, and easing raw material costs, providing a boost to profitability. This marked Colgate’s sixth consecutive quarter of gross margin expansion, reflecting effective cost management and strategic pricing.

The company raised its full-year guidance for both net sales and EPS, now expecting net sales growth between 3-5%, up from the prior 2-5% forecast, and organic sales growth between 7-8%, revised from 6-8%. EPS growth expectations were lifted to 10-11% from the prior 8-11%, supported by favorable margin trends and increased advertising investments. This updated guidance indicates management’s confidence in sustaining revenue and profitability momentum amid a challenging economic backdrop.

Despite the positive financial performance, investor reaction was tepid, with Colgate shares down approximately 1.5% pre-market. The market’s muted response suggests that while Colgate’s results were solid, investor expectations were likely high following a strong first half of the year and favorable performance from other consumer staples. Looking ahead, management’s commitment to expanding advertising investments and brand building could serve as a tailwind for sustained growth, but North America’s underperformance and the competitive landscape remain key areas to watch.

$98 looms as a key support level for investors. A failure to hold this area will set up a test at the 200-day MA ($94).