Company Reports

We’ve long held no-moat Church & Dwight lacks the scale, resources, and negotiating prowess of its larger brethren. We see this as an unenviable position, particularly when juxtaposed with persistent macro and competitive pressures, cost headwinds, and supply chain tension. Although Church has emphasized 40% of its mix skews toward value offerings, we're skeptical this alone will insulate it. Rather, we posit Church’s category mix makes the firm susceptible to consumers trading down or out if their financial position warrants. Beyond the top line, we surmise reaching its 45% prepandemic gross margin could be delayed by intensifying competition (from well-resourced peers and lower-priced private-label offerings) if promotional spending steps up from relatively dormant levels the past few years. As a smaller operator with less-entrenched retail relationships, we think this could put Church in the crosshairs, making further margin expansion harder to come by. Further, while inflationary headwinds in aggregate have died down, labor, transportation, and logistics remain elevated and could put added pressure on its margin trajectory.

On the surface, no-moat Church & Dwight posted decent fourth-quarter results—5.3% organic sales growth and a 260-basis-point bump in gross margin to 44.6%. However, the firm was lapping tepid year-ago performance, when organic sales edged up a mere 40 basis points. And, in our view, Church’s category mix makes the firm susceptible to consumers trading down or out if their financial position warrants. Beyond the top line, we surmise reaching its 45% prepandemic gross margin could be spoiled by intensifying competition (from larger and better-resourced peers and lower-priced private-label offerings) if promotional spending steps up from relatively dormant levels the past few years. As a smaller operator with less entrenched retail relationships, we think this could put Church in the crosshairs, making further margin expansion harder to come by. Further, while inflationary headwinds in aggregate have died down, labor, transportation, and logistics remain elevated and could put added pressure on its margin trajectory.

We’ve long held no-moat Church & Dwight lacks the scale, resources, and negotiating prowess of its larger brethren. We see this as an unenviable position, particularly when juxtaposed with persistent macro and competitive pressures, commodity cost headwinds, and supply chain tension. For one, we expect industry cost inflation (raw materials, distribution, manufacturing, and labor) to remain elevated, as management foresees $120 million in incremental costs in fiscal 2023. But as an offset, Church has raised prices in around 80% of the aisles in which it plays, and we think near-term volumes could remain constrained as consumers opt to trade down or out of the categories in which it plays in response to escalating prices at the shelf. Although Church has emphasized 40% of its mix skews toward value offerings, we're skeptical this will insulate it, especially if it forgoes marketing spending, which amounted to a paltry 10% of sales in fiscal 2022, down from the 12% historically expended. In our view, a lack of investment here inhibits the ability of Church's fare to stand out at the shelf.

We don’t expect any change to our $61 fair value estimate (beyond time value) after dissecting no-moat Church & Dwight’s third-quarter print, which included 4.8% organic sales growth. This was the first quarter of the last eight Church was able to eek out volume growth—to the tune of 2.7%, even as prices rose 2.1%—which could suggest its mix is winning with a cash-constrained consumer (as 40% of its portfolio is made up of value offerings). However, our enthusiasm is tempered as it was lapping dismal year-ago results, which included an 8.5% downdraft in volumes, as consumers turned their backs on Church’s more discretionary product lineup (WaterPik, VitaFusion, and Flawless).

On the surface, no-moat Church & Dwight’s second-quarter marks (5.4% organic sales growth and 270 basis points of gross margin expansion to 43.9%) might suggest the firm is finally turning the page on what has been a challenging operating landscape. Recall, its discretionary brands (Flawless, WaterPik, and VitaFusion, about 20% of sales) have faltered of late, as consumers have turned their backs on these categories as they’ve worked to rationalize unnecessary spending. But we’d suggest that even the other 80% of its mix includes categories (depilatories, condoms, pregnancy tests) that cash-constrained consumers might opt to forgo (with management citing that just six of its 14 power brands in the U.S. gained share in the quarter), weakening its ability to raise prices to offset the inflationary angst it continues to face.

We’ve long held no-moat Church & Dwight lacks the scale, resources, and negotiating prowess of its larger brethren. We see this as an unenviable position, particularly when juxtaposed with unrelenting macro and competitive pressures, commodity cost headwinds, and supply chain tension. For one, we expect industry cost inflation (raw materials, distribution, manufacturing, and labor) to remain elevated, as management foresees $125 million in incremental costs in fiscal 2023. But as an offset, Church has raised prices in around 80% of the aisles in which it plays, and we think near-term volumes could remain constrained as consumers opt to trade down or out of the categories in which it plays in response to escalating prices at the shelf. Although Church has emphasized 40% of its mix skews toward value offerings, we're skeptical this will insulate it, especially if it keeps a lid on marketing, which amounted to a paltry 10% of sales in fiscal 2022 (and less than 9% in the first quarter of fiscal 2023), down from the 12% historically expended. In our view, a lack of investment here inhibits the ability of Church's fare to stand out at the shelf.

After unpacking no-moat Church & Dwight's first-quarter results (5.7% organic sales growth and a 70-basis-point downdraft in adjusted operating margin to 20.9%), we don't anticipate any change to our $60 fair value estimate. The sales increase was entirely a byproduct of higher prices and favorable mix as volumes held flat, evidencing an anemic brand mix. Cost pressures (a 360-basis-point drag on gross margin) persist; Church still expects $125 million in incremental commodity, distribution, and labor costs in fiscal 2023 on top of the $290 million and $250 million incurred in fiscal 2021 and 2022, respectively.

We’ve long held no-moat Church & Dwight lacks the scale, resources, and negotiating prowess of its larger household and personal care brethren. We see this as an unenviable position, particularly when juxtaposed with unrelenting macro and competitive pressures, commodity cost headwinds, and supply chain tension. For one, we expect industry cost inflation (raw materials, distribution, manufacturing, and labor) to remain elevated, as management foresees $125 million in incremental costs in fiscal 2022. But as an offset, Church has raised prices in around 80% of the aisles in which it plays, and we think near-term volumes could remain constrained as consumers opt to trade down or out of the categories in which it plays in response to escalating prices at the shelf. Although Church has emphasized 40% of its mix skews toward value offerings, we're skeptical this will insulate it, especially if it keeps a lid on marketing, which has amounted to a paltry 10% in fiscal 2022, down from the 12% historically expended. In our view, a lack of investment here inhibits the ability of Church's fare to stand out at the shelf.

We don’t expect to alter our $58 fair value estimate for no-moat Church & Dwight materially after parsing through its uninspiring fourth-quarter results. Organic sales edged up a mere 40 basis points (as a 4.2% benefit from higher prices was partially offset by a 3.8% volume slump) and its gross margin slipped 50 basis points to 42%. We posit this subpar performance supports our contention that Church has failed to carve out a competitive edge, though the market doesn’t seem to share our sentiment (as shares edged up 4% on the print), rendering the stock about 40% overvalued relative to our intrinsic valuation. In this vein, we estimate the market price implies 5% average annual organic revenue growth over the next decade and operating margins that improve to the mid-20s, both of which outpace our respective expectations for 3% and low-20s, respectively.

We’ve long held no-moat Church & Dwight lacks the scale, resources, and negotiating prowess of its larger household and personal care brethren. We see this as an unenviable position, particularly when juxtaposed with unrelenting macro and competitive pressures, commodity cost headwinds, and supply chain tension. For one, we expect industry cost inflation (raw materials, distribution, manufacturing, and labor) to remain elevated, as management foresees $135 million in incremental costs in fiscal 2022. But as an offset, Church has raised prices in around 80% of the aisles in which it plays, and we think near-term volumes could remain constrained as consumers opt to trade down or out of the categories in which it plays in response to escalating prices at the shelf. Although Church has emphasized 40% of its mix skews toward value offerings, we're skeptical this will insulate it, especially if it keeps a lid on marketing, which has amounted to a paltry high-single-digit percentage of sales through the first nine months of fiscal 2022, down from the 12% historically expended. In our view, a lack of investment here inhibits the ability of Church's fare to stand out at the shelf.

No-moat Church and Dwight’s tepid third-quarter results prove the firm has failed to carve out a competitive edge. This is a factor we think the market underappreciates, as shares still trade at a 25%-30% premium to our unchanged $59 fair value estimate despite a 20% downdraft in its share price over the past three months. And as such, we suggest investors remain on the sidelines.

As a means to jumpstart growth, no-moat Church & Dwight is adding Hero (a leader in the acne patch category) and its Mighty Patch brand to the mix for $630 million, a deal that is set to close in the fourth quarter. While we see the strategic merit of the tie-up (with the brand slated to chalk up midteens sales growth next year as Church leverages its network within the personal care realm to expand Hero’s distribution), the purchase price is difficult to swallow, with a trailing 12-month price/sales multiple of around 5.5 times. Over the last several years, Church has salivated for deals with rich price tags (including WaterPik, Flawless, Zicam, and TheraBreath). Despite this, we aren’t altering our standard capital allocation rating at this juncture given the small size (at around 2% of sales) and complementary nature of the product set.

We’ve long held no-moat Church & Dwight lacks the scale, resources, and negotiating prowess of its larger household and personal care brethren. We see this as an unenviable position, particularly when juxtaposed with unrelenting macro and competitive pressures, commodity cost headwinds, and supply chain tension. For one, we expect industry cost inflation (raw materials, distribution, manufacturing, and labor) to remain elevated, as management now foresees $135 million in incremental costs in fiscal 2022, up from $85 three months ago. But as an offset, Church has raised prices in around 80% of the aisles in which it plays, and we think near-term volumes could be constrained as consumers opt to trade down or out of the categories in which it plays in response to escalating prices at the shelf. Although Church has emphasized 40% of its mix skews toward value offerings, we're skeptical this will insulate it, especially if it keeps a lid on marketing, which has amounted to a paltry high-single-digit percentage of sales, down from the 12% historically expended. In our view, a lack of investment here inhibits the ability of Church's fare to stand out at the shelf.

We’ve long held no-moat Church & Dwight lacks the scale, resources, and negotiating prowess of its larger household and personal care brethren. We see this as an unenviable position, particularly when juxtaposed with unrelenting macro and competitive pressures, commodity cost headwinds, and supply chain tension. The pain inflicted from these factors manifested in weak second-quarter marks for Church. While organic sales edged up 3.4%, a 6.3% increase in prices charged prompted a 2.9% drawdown in volumes (reflective of Church’s inferior pricing power, in our view), with particular impact in its more discretionary offerings (WaterPik and Flawless, which combined represent around 10% of its sales). Further, its gross margin contracted 220 basis points to 41.2%, and, as inflation is unlikely to abate, management now foresees $135 million in incremental costs in fiscal 2022, up from $85 million three months ago.

Throughout the pandemic, social distancing and COVID-19-related pantry stocking led to impressive sales growth for Church & Dwight, at a mid-single-digit clip each quarter on an organic basis. But we expect industry promotional activity to ramp up as the supply/demand imbalance is rectified. Further, we think near-term volumes could be constrained as consumers opt to trade down or out of the categories in which Church plays in response to escalating prices at the shelf. This underpins our expectations for sales growth to revert to the firm's historical low- to mid-single-digit rate.

Supply chain disruptions and rising costs affected no-moat Church & Dwight in the first quarter. Organic sales edged up 2.7% as higher prices (up 8%) were partially offset by contracting volume (down around 5%). A portion of this pullback is a byproduct of inadequate supply; fill rates improved to the mid- to high 80s of late but still lag the high 90s that characterized the business in the past. However, we think this could also reflect consumers trading down or out of the categories in which Church plays. We don’t anticipate these pressures will subside, as prices at the shelf continue to climb and government benefits decrease. In this context, Church suggested its value products (40% of its mix) have been winning relative to its premium fare.

Throughout the pandemic, social distancing and COVID-19-related pantry stocking led to impressive sales growth for Church & Dwight, at a mid-single-digit clip each quarter on an organic basis. But we expect industry promotional activity to ramp up as the supply/demand imbalance is rectified. As such, we anticipate a reversion to the firm's historical low- to mid-single-digit sales growth rate.

Church & Dwight has clearly been a beneficiary of consumers’ penchant for cleaning, disinfecting, and health and wellness fare. Organic sales popped 4.3% in the fourth quarter, on top of nearly 11% gains in the year-ago period. However, given a rash of inflationary headwinds, higher prices and favorable mix (6% benefit) drove the entirety of the sales uplift, as fill rates remained in the low-80s versus the high-90s it boasts in a normalized environment. And these pressures will likely persist, as management is expecting a 5%-6% increase in its cost of goods sold this year, on top of a 9% hike in fiscal 2021. As such, its likely Church will continue to seek out opportunities to raise prices, though we expect volumes will remain tepid, in line with historic precedent.

On Nov. 29, no-moat Church & Dwight announced the $580 million acquisition of TheraBreath, the second largest brand in the alcohol-free mouthwash space with a 14% market share.

Throughout the pandemic, social distancing and COVID-19-related pantry stocking have led to impressive sales growth for Church & Dwight (similar to peers), up around a mid-single-digit clip each quarter on an organic basis. But we expect industry promotional activity to ramp up as the supply-demand imbalance is rectified. As such, we anticipate a reversion to the low- to mid-single-digit sales rate the firm has historically chalked up.