Clorox Earnings: Stellar Gross Margin Improvement Fuels Brand Spending; Shares a Touch Undervalued

There was a lot to like in wide-moat Clorox’s CLX 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.

In the face of these challenges, we don’t posit Clorox will just lean on pricing. Rather, we surmise it will remain resolute in scouring the business for inefficiencies (a 210-basis-point margin benefit, outpacing its 180-basis-point long-term annual average). We anticipate a portion of any savings realized will cultivate brand spending—our forecast calls for Clorox to expend 12% of sales ($1 billion) annually toward research, development, and marketing. We also suspect it will push ahead on efforts to enhance its digital capabilities and streamline its operations—a $500 million investment in the next few years—with the aim of boosting its agility and pushing decision-making closer to the end consumer. In our view, such investments should foster its relationships with retailers and consumers.

Combining fiscal 2023 marks that eclipsed our forecast ($5.09 in adjusted EPS versus $4.45), a more favorable fiscal 2024 earnings target ($5.60-$5.90 in adjusted EPS versus our preprint $5.29 estimate, which we’ll move to within the guided range), and time value should result in a low- to mid-single-digit increase to our $166 fair value estimate. When juxtaposed with the high-single-digit percentage bounce after hours, shares trade only a shade below our intrinsic valuation; however, we suggest investors keep an eye on the name in the event sentiment sours.