Church & Dwight Earnings: Sales Growth Fails to Presage Subdued Competitive Backdrop; Shares Rich

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.