Thursday 14 December 2017

Are retail changes wiping smile from Colgate's face?

Share watch with John Lynch
Share watch with John Lynch

John Lynch

Would anyone seriously like to meet the person who never heard of Colgate-Palmolive? Thought not. The US consumer products company is a personification of the industry that made us all change our personal hygiene habits.

What did we do before toothpaste or shampoo or deodorants or indeed soap, other than make sure we stood downwind?

While there is no shortage of 20th and 21st century inventions that we find indispensable, the personal hygiene revolution of the 19th century, of which Colgate-Palmolive, Procter and Gamble, Pears, Yardley and Lever Bros played a significant part, was one of the great consumer changes that is still yielding extraordinary profits.

Colgate, which invented its first toothpaste tube as far back as 1896, is currently valued at $60bn (€56bn), with 37,000 employees and it markets its extensive range of products in 200 countries.

To say it made its mark in the area of oral hygiene is an understatement. It controls some 45pc of the world's toothpaste market.

Oral care accounts for almost half of group sales followed by personal and homecare with a fifth each. But being that big has its drawbacks too.

While Colgate-Palmolive's global footprint is extensive, it sells in a highly competitive market where there has been trade concentration and a lot of discounting.

The company is increasingly dependent on the ever-changing retail sector. Therefore it is no surprise that Walmart is its biggest customer, accounting for 11pc of group sales.

The operations of oral, personal and homecare business are managed geographically with five reportable regions - North and Latin America, Europe, Asia and Africa.

Three-quarters of group sales are generated outside the US with over half coming from emerging markets. Surprisingly, Latin America is the company's largest market with 27pc of group sales, and its largest headache.

Its sales fell in the last two years, with volume decline, weak currencies against the dollar and price competition, not helping.

The fall in operating profits was mitigated by the decrease in expenses. Europe, with 18pc of group sales, plunged even more than Latin America. Sales were down as were profits with foreign exchange and lower homecare sales the main reason.

Asia, with 15pc of group revenues, like most areas, saw sales decline.

North America was the only bright spot for Colgate in the last year or so with an increase in sales of toothpaste, shower gel and fabric softener.

Operating profits were up, thanks to the company's restructuring programme and a shift from traditional advertising to sales promotion activities and digital marketing.

Global sales for 2016 were $15.3bn, a fall of $700m and the lowest in the last six years. As most of the company's revenue is outside the US, the strength of the dollar has put a dampener on sales revenue.

The latest results disappointed, given the continued currency headwinds. Colgate is now in the 10th straight quarter of revenue declines in all regions except North America and Africa.

Sales of oral, personal and homecare fell and pet food, the group's other mainstay, also reported sales in decline.

In relation to operating profits the picture is similar to that of sales. However, Colgate has a strong balance sheet and cash flow.

Long-term investors are pleased that over the last 10 years the share price has doubled to around the $64 level, down from its record high of $75 late last year. Of some concern to investors is the fall in margins.

The company's price earnings multiple is high enough at 24, valuing it at $60bn. While Colgate is a good company with strong brands, it has a sparklingly bright and dominant position in the global toothpaste market.

General market conditions and currency volatility continue to challenge the New York-based company, but it has a shiny smile.

Nothing in this section should be taken as a recommendation, either explicit, or implicit to buy any of the shares mentioned

Irish Independent

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