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Will Promotion Costs Hurt Church & Dwight (CHD) Q3 Earnings?

Church & Dwight Co., Inc. CHD) is slated to release third-quarter 2017 results on Nov 2. The question lingering in investors’ minds is, whether this leading manufacturer and marketer of personal care, household and specialty products will be able to post a positive earnings surprise again in the to-be-reported quarter. The company has been delivering positive earnings surprise for three straight quarters now. Let’s see how things are shaping up prior to this announcement.

What to Expect?

The current Zacks Consensus Estimate for the quarter under review is pegged at 47 cents, which is in line with the year-ago period figure. Further, the earnings estimate has trended upward in the last 30 days. Also, analysts polled by Zacks expect revenues of $937 million, up roughly 7.6% from the year-ago quarter.

Factors at Play

A look at Church & Dwight’s past performance reveals that out of the past 13 quarters, the company’s bottom line has outpaced the Zacks Consensus Estimate in 10 quarters, while the top line has surpassed the same 11 times. The impressive past performance can be attributed to Church & Dwight’s solid brand portfolio, along with focus on acquisitions and innovations. Evidently, in the last quarter, sales grew 2.3% on the back of acquisitions. Organic sales climbed 1.8% as higher volumes were largely offset by higher promotional investments, which continues to be a hurdle. While shares of the company have gained 3.8% so far this year, it has underperformed the industry’s jump of 16.3%.

Higher Promotional Costs & Pricing Pressure May Dent Margins

Segment-wise, the company witnessed strong organic sales growth at Consumer International and Specialty Products units, while growth at the Consumer Domestic unit decelerated from the previous quarter. Moreover, increased promotion and coupon investments in the domestic business dented the company’s gross margin, which also weighed upon earnings. Further, the company expects higher marketing spending in support of new product launches and increased promotional spending to squeeze gross margins in the third quarter. Also, Church & Dwight continues to expect modest inflationary environment. These factors, along with pricing pressure, stiff competition and weak demand in many of its markets remain headwinds for the company.

Contributions From Buyouts to Aid Top Line, Q3 Forecasts

Nonetheless, management remains confident of its performance, thanks to its stable portfolio of value and premium products, launch of new and innovative products, aggressive productivity programs and tight expense management. All said, in third-quarter 2017, the company expects reported and organic sales growth of 3.5%. Organic sales at the domestic unit is estimated to rise 3 %. Further, Church & Dwight envisions adjusted earnings of 46 cents in the quarter, including 2 cents of net dilution from Water Pik acquisition costs.

As the domestic segment contributes a major chunk to Church & Dwight’s total revenues, let’s look at the third quarter Zacks Consensus Estimate for the segment. The revenue consensus estimate for the Consumer Domestic segment is pegged at $710 million, reflecting year-over-year growth of 6.8%. The consensus mark for Consumer International and Specialty Products segments are pegged at $147 million and $76 million, representing year-over-year growth of 9.7% and 5.6% respectively.  

What the Zacks Model Unveils?

Our proven model does not conclusively show that Church & Dwightis likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESPand a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with ourEarnings ESP Filter.

Church & Dwight currently carries a Zacks Rank #3 (Hold). However, the company currently has an Earnings ESP of -0.10%. The combination of Church & Dwight’s Zacks Rank #3 and a negative ESP makes surprise prediction difficult.

Stocks With Favorable Combination

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post earnings beat:

Avon Products, Inc. AVP has an Earnings ESP of +2.94% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ralph Lauren Corporation RL has an Earnings ESP of +2.63% and a Zacks Rank #2.

The Hain Celestial Group, Inc. HAIN has an Earnings ESP of +5.22% and a Zacks Rank #2.

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