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Morningstar | Colgate Brushes Up Its Competitive Edge to Drive Improving Sales Growth Despite Facing Headwinds

Colgate chalked up tepid performance the last few years, including 2018, when organic sales edged up 0.5% and margins retreated 60 basis points at the gross income line to 59.4% and the operating income line to less than 25%. Despite recent pressure, we don't posit its competitive edge is showing signs of decay. While a few ancillary factors have constrained its top line (including a trucker strike in Brazil and retailer inventory destocking in China), we attribute a portion of the margin pressure to an uptick in inflationary headwinds and the decision to boost ad spending, which we believe stands to support its leading brand mix and value-added innovation. Further, we surmise this spending entrenches Colgate's position with retailers and professionals (dentists, veterinarians, and dermatologists), supporting its wide moat. In our view, the success of these efforts is evidenced as it continues to hold and even gain share in several of the markets, including Brazil (more than 50% share, according to GlobalData) and Mexico (about 70%).As a means to offset inflationary headwinds and unfavorable foreign exchange while also fueling brand spend, we believe management's stringent eye on driving efficiencies is prudent, targeting $500 million-$575 million in savings by the end of 2019 (around 5% of cost of goods sold and operating expenses excluding depreciation and amortization). Further, the firm is selectively raising prices (which aligns with actions by peers), and while concerns about the competitive landscape and the potential contraction in volumes that could ensue is valid, we posit Colgate is proactively taking steps to ensure its wide moat proves unwavering.In this vein, Colgate consistently brings new products to market tailored to win with local consumers. In addition, we’re encouraged Colgate remains staunch in its reluctance to chase short-term promotional volumes, which we see as supportive of the inherent brand equity in its mix. From our vantage point, it is these factors that have enabled Colgate’s global toothpaste market share to hold in the 40s for the better part of the last decade, and we don’t expect its share position will be permanently eroded.