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While some consumer staples companies continue to struggle as the consumer trades down, Colgate-Palmolive (NYSE:CL) posted decent second quarter results. Revenue advanced 2% year-over-year to $4.3 billion, slightly below consensus estimates as a result of the negative impact of currency. But net of the negative impact of currency, revenue rose 5.5% year-over-year. Earnings per share grew 5% year-over-year to $0.70 when adjusted for the one-off impact of restructuring charges. Free cash flow generation was solid, totaling $1.1 billion year-to-date or 12% of revenue.

On the cost side, we saw some modest profitability expansion as its gross margin rose 70 basis points year-over-year, to 58.6%. The firm's focus on expanding its gross margin via productivity and price increases is clearly yielding results, as CEO Ian Cook said on the conference call:

"So if you start with 57.9%, which was the second quarter gross profit in the prior year, pricing gave us 40 basis points Funding the Growth, following our usual pattern where second quarter Funding the Growth steps up from the first, was 210 basis points, actually better than what we delivered in 2012. Material prices were a headwind of 180 basis points, and the combination of that and the pricing gives us the 70-basis-point growth that we saw in the second quarter."

SG&A costs weren't as well contained, as we saw fixed costs rise to 34.8% of revenue during the quarter, an increase of 60 basis points over the same period a year ago. Overhead spending was reduced slightly, but the firm invested heavily in advertising, which helped to drive sales growth.

On a geographic basis, Colgate-Palmolive made some share gains in the North American toothpaste market, leading organic revenue in the region to increase 5% year-over-year during the quarter. More importantly, the firm's operating margin jumped 370 basis points year-over-year to 29.8% of sales, as Colgate-Palmolive's "funding-the-growth" initiatives continue to yield fantastic results. Operating profit in the region jumped 20% year-over-year to $227 million.

Latin American revenue declined 1.5% year-over-year as the entire region saw its currencies depreciate relative to the US dollar; organic sales increased 7% year-over-year in the region. Operating profit in the region declined 6% year-over-year as the firm experienced some gross margin pressure and ramped advertising spending to help increase sales. The company also experienced share gains in the toothpaste markets of Brazil and Mexico thanks to new product launches.

European revenue declined 3% year-over-year to $824 million as the company was unable to hold the line on pricing. Nevertheless, the aforementioned "funding-the-growth" initiatives yielded 180 basis points of margin expansion; thus, total operating profit in the region jumped 6% year-over-year to $189 million.

Greater Asia/Africa performed fantastically during the second quarter as reported revenue surged 8.5% year-over-year and organic revenue increased 9.5% compared to the prior year. Recent investments at Colgate have focused on expanding distribution into rural regions, which has already translated into strong sales expansion. Operating profit in the region increased 8% year-over-year as operating margin growth was constrained by increased advertising spending.

Looking ahead, the firm dialed back earnings growth expectations as reported results are going to be impacted by ongoing currency headwinds. Earnings per share in 2013 are now expected to grow 4.5%-5.5%, on a dollar basis, compared to previous guidance of 5.5%-6.5% expansion. We do not think this guidance cut is anything that investors should worry too much about.

Valuentum's Take

Overall, we were pleased with Colgate-Palmolive's second quarter results and continue to be impressed by the firm's ability to expand gross margins. However, we do not think the firm's yield (modestly over 2% at the time of this writing) justifies a position in our portfolio at this time.

Source: Why Colgate-Palmolive's Revenue Expansion Isn't Bad