A Torrent of Transitory Cost Pressures Continue to Strangle Clorox's Profits; Shares Attractive

The foremost concern ahead of Clorox’s fiscal 2022 third-quarter print was the extent to which inflationary pressures would affect its gross margin. And despite posting a 760-basis-point degradation in gross margin (reflecting a 410-basis-point contraction stemming from commodities and 570 basis points from manufacturing and logistics), the 35.9% posted was nearly 300 basis points above the prior quarter, suggesting Clorox’s efforts to increase prices and reduce inefficiencies (a 270-basis-point benefit in aggregate this quarter) to dull the profit hit are starting to gain traction. We view this as particularly encouraging against a backdrop whereby cost pressures are being exacerbated by the crisis in Ukraine. The volatile global political and economic environment prompted Clorox to now guide for an 800-basis-point pullback in its fiscal 2022 gross margin due to $530 million in incremental commodity, manufacturing, and logistics costs, $30 million above previous expectations.