This quarter was no different as CL posted EPS of $0.67, edging out the $0.66 consensus, as net sales fell 2.9% to $3.88 bln, also slightly ahead of the $3.86 bln forecast. Click here to access its earnings press release.
The main underlying story for CL, and for other consumer staple companies like Procter & Gamble (PG), Kimberly-Clark (KMB), and Clorox (CLX), has been that rising commodity, transportation, and packaging costs have been cutting into margins and profits. Last quarter, CL's gross margin decreased by 100 basis points to 59.4%, despite some price increases and cost savings from its Global Growth and Efficiency Program.
Unfortunately, there wasn't any improvement on that front in Q1 as adjusted gross margin slid to 59.2%, down 110 basis points from last year, due to the same cost pressures it had been facing before. Additionally, since KMB and PG have already issued their quarterly results, we can draw some comparisons in performance.
PG reported that its Q1 adjusted gross margin was flat yr/yr at 49.2% as productivity savings and pricing increases offset the impact from commodity costs. KMB, meanwhile, reported that its Q1 adjusted operating income stabilized at 17.4%, while CL's adjusted operating margin fell by 180 basis points to 23.4%.
We can infer a couple possibilities from this data. One possibility is that PG has been more successful in pushing through price increases than CL has been. Or perhaps the mix of raw materials CL uses is more unfavorable in terms of cost than are those of PG or KMB. Or maybe it is a combination of the two. However, it is worth pointing out that in absolute terms, CL still has significantly higher gross margin that both of those companies.
While CL has been dealing with rising costs, it has also been ramping up investments in certain product categories in order to stimulate higher growth. Specifically, it is focused on expanding its skin care business, including its Elta MD and PCA Skin products. Simultaneously, CL is bringing some of its top-performing brands - like Elmex and Meridol - into new markets.
This strategy appears to be having some early success, as the company’s Q1 organic sales growth improved to 3% from 2% last quarter.
From a geographic standpoint, North America led with organic sales growth of 3.5%, driven by a mix of unit volume growth (+2%) and price increases (+1.5%). CL also maintained its market leadership in the toothpaste category at 34.8%.
However, the Asia Pacific region continues to be a soft spot, with net sales down 8%. The primary culprit is China, which experienced volume declines, feeding into ongoing concerns about the slowing economy there.
In addition to the upside Q1 results, CL also reaffirmed its outlook for FY19, forecasting organic sales growth of 2-4%, led by stronger pricing and the re-launches of Colgate Total and Hill's Science Diet products.
Furthermore, the company still expects gross margin to expand this year despite the consistent commodity price pressures it has faced. That is particularly encouraging news because it suggests that the worse may be over in terms of margin compression.
Key Takeaways: CL has done a solid job of executing and managing expectations as it once again squeezed out a better-than-expected earnings report. Unlike its consumer staple peers, it continued to see margin compression this quarter. But CL reaffirmed its outlook for FY19, including its expectation for margin expansion this year, along with improved organic sales growth of 2-4%. That positive outlook is what investors are latching onto this morning.