Company Reports

The market soured on Clorox after it printed tempered third-quarter marks, sending shares down at a low- to mid-single-digit percentage clip in after-hours trading. However, we never expected Clorox’s turnaround would head due north. Thus, we don’t anticipate any change to our $169 fair value estimate, beyond a low-single-digit bump for the time value of money. With shares at around a 15% discount to our intrinsic valuation, we think investors would be wise to stock up on this wide-moat company.

The fruits of Clorox's work to put pronounced inflationary headwinds and supply chain angst to rest were sidelined as a cybersecurity breach in mid-August forced it to take some information technology systems (including ordering) offline. Although this initially strangled sales and profits, we don’t surmise the firm’s competitive edge has been eroded. On the contrary, we think its entrenched standing with retailers has already and will continue to enable it to build back its shelf position, similar to its inventory revival during the pandemic.

We surmise that the speed wide-moat Clorox employed to rebuild retailer inventories, underpinned by its unwavering brand prowess, resulted in its impressive second-quarter performance. Organic sales shot up 20%, reflecting a 13% increase in volumes and a 7% price hike, while the gross margin surged 730 basis points to 43.5%, reflecting higher prices, cost savings, and fixed-cost leverage on stepped-up shipments.

The fruits of Clorox's feverish work to put pronounced inflationary headwinds and supply chain angst to rest were recently waylaid as a cybersecurity breach in mid-August forced it to take some information technology systems (including ordering) offline. Although this strangled sales and profits, we don’t surmise the firm’s competitive edge has been eroded. On the contrary, we think its entrenched standing with retailers has already and will continue to enable it to build back its shelf position, similar to its inventory revival during the pandemic.

While still reeling from a cybersecurity breach in mid-August, we surmise wide-moat Clorox’s first quarter marks evidence it’s working expeditiously to repair deflated inventory levels and regain forgone distribution. In this context, the firm reported an 18% slump in organic sales and $0.49 in adjusted EPS, both of which outpaced the 21%-26% organic sales rout and $0.40 per share loss to flat adjusted EPS that management was calling for just a month ago. And the market seems to share our sentiment, sending shares up nearly 10% in afterhours.

On Oct. 4, Clorox issued preliminary first-quarter results, which are estimated to include an organic sales decline of 21% to 26% and an adjusted EPS loss of $0.40 to flat. This dismal performance reflects the fact that the firm’s operations were shackled by a cybersecurity breach in August that prompted it to take some information technology systems (including ordering) offline, though it resumed automated processes in September and is working to rebuild retailer inventory levels.

While volume growth has been hard to come by since the pandemic prompted consumers to scour the shelves for Clorox’s fare, we don’t think consumers are turning their backs on Clorox’s cleaning and disinfecting products, as overall sales remain well above where they were before the pandemic, to the tune of 20%-30% of late. This prowess is further evidenced by its disinfecting wipes offering, which has been gaining market share.

There was a lot to like in wide-moat Clorox’s fourth-quarter print, with organic sales up 14% and adjusted gross margin surging 560 basis points to 42.7% (far above the nadir of 33% in fiscal 2022’s second quarter and approaching the 43%-44% levels that have historically characterized the business). Pricing was a large contributor, buoying the top line by 16% while aiding margin to the tune of 670 basis points. However, inflationary headwinds persist (serving as a 370-basis-point offset) and are unlikely to abate in fiscal 2024, with higher commodities prices and wages expected to dent profits by about $200 million.

While volume growth has been hard to come by since the pandemic prompted consumers to scour the shelves for Clorox’s fare, we don’t think consumers are turning their backs on Clorox’s cleaning and disinfecting products, as overall sales remain well above where they were before the pandemic (to the tune of 20% in its fiscal third quarter). This prowess is further evidenced by its disinfecting wipes offering, which has been gaining market share.

The question heading into Clorox’s third-quarter print was whether, following its 320-basis-point second-quarter boon, it would again chalk up gross margin improvement amid inflationary headwinds. Clorox delivered, posting a 590-basis-point bump in gross margin to 41.8%, which was above the sub-36% level it eked out in fiscal 2022, but still shy of typical 43% marks of previous years. The improvement resulted from actions to raise prices (750-basis-point benefit) and unearth cost savings (150-basis-point benefit) that partially offset increased commodity, manufacturing, and logistics costs (350-basis-point hindrance). Moreover, we anticipate Clorox will continue to rebuild profits.

The pandemic prompted consumers to scour the shelves for Clorox's fare, boosting sales. And even as volume growth is decelerating, we don’t think consumers are turning their backs on Clorox’s cleaning and disinfecting products, as overall sales remain well above where they were before the pandemic (to the tune of 7% in its fiscal second quarter). This prowess is further evidenced by its disinfecting wipes offering, which has been gaining market share.

Rampant cost inflation has dogged Clorox the past few quarters, but it finally appears efforts to raise prices and extract inefficiencies are gaining traction. Clorox chalked up a 320-basis-point improvement from last year in adjusted gross margin to 36.2%, as a 680-basis-point boost from higher prices and 180-basis-point benefit from cost savings offset a 340-basis-point drag from stepped up commodities, manufacturing, and logistics costs. We don’t think Clorox will back down in its pursuit of margin enhancement, as it works to rebuild gross margins to historical 43%-44% levels.

The pandemic prompted consumers to scour the shelves for Clorox's fare, boosting sales. And even as volume growth is decelerating, we don’t think consumers are turning their backs on Clorox’s cleaning and disinfecting products, as sales remain well above where they were before the pandemic (to the tune of 5% in its fiscal first quarter). This prowess is further evidenced by its disinfecting wipes offering, which has been gaining market share.

Much consternation has been spurred by the retreat in Clorox’s gross margins—36% in its first fiscal quarter, down 110 basis points from last year, though quite depressed relative to the mid-40s the firm has historically boasted. However, we don’t think Clorox is sitting still and believe efforts to raise prices (a 530-basis-point benefit to gross margins in the quarter) and extract inefficiencies (a 180-basis-point benefit) should ultimately boost profits.

The pandemic prompted consumers to scour the shelves for Clorox's fare, boosting sales. And even as volume growth is decelerating, we don’t think consumers are turning their backs on Clorox’s cleaning and disinfecting products, as sales remain well above where they were before the pandemic (to the tune of 5% in its fiscal fourth quarter). This prowess is further evidenced by its disinfecting wipes offering, which posted its fourth-consecutive quarter of market share gains.

The pandemic prompted consumers to scour the shelves for Clorox's fare, boosting sales. And even as volume growth is decelerating, we don’t think consumers are turning their backs on Clorox’s cleaning and disinfecting products, as sales remain well above where they were before the pandemic (to the tune of 5% in its fiscal fourth quarter). This prowess is further evidenced by its disinfecting wipes offering, which posted its fourth-consecutive quarter of market share gains.

Despite posting fiscal 2022 marks (3% net sales decline and $4.10 in adjusted EPS) bang in line with our outlook (down 3.1% and $4.09), Clorox sounded the alarm on its fiscal 2023 profit potential, calling for $3.85-$4.22 in adjusted EPS versus our pre-print $5.54 estimate (partly due to 24% tax rate versus our 22.5% forecast). This sent shares down by a mid-single-digit percent. We don’t deny higher manufacturing and logistics (a 290-basis-point drain in the fourth quarter) and commodity (350 basis points) costs persist. However, we think efforts to scour the business in search of inefficiencies (with cost savings proving a 190-basis-point benefit) and to raise prices (330 basis points) should manifest in continued sequential margin gains. In this context, gross margins amounted to 37.1% in the fourth quarter, up from a nadir of 33% in the second quarter and 35.9% in the third quarter.

The pandemic prompted consumers to scour the shelves for Clorox's fare, boosting sales. And even as volume growth is decelerating, we don’t think consumers are turning their backs on Clorox’s cleaning and disinfecting products, as sales remain well above where they were before the pandemic (to the tune of 5% in its fiscal third quarter). This prowess is further evidenced by its disinfecting wipes offering, which posted its third-consecutive quarter of market share gains.

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.

The pandemic prompted consumers to scour the shelves for Clorox's fare, boosting sales. And even as volume growth is decelerating, we don’t think consumers are turning their backs on Clorox’s cleaning and disinfecting products, as sales remain well above where they were before the pandemic. For one, its health and wellness arm (around 40% of sales, housing its retail and professional cleaning operations) was up 20% in the first and second fiscal quarters on a two-year stack basis. Further evidencing the strength of its brand mix, Clorox just posted its second consecutive quarter of double-digit market share gains in the disinfecting wipes aisle.