Clorox Earnings: Transitory Cyberattack Hit Unlikely to Thwart Its Wide Moat; Shares Undervalued

While still reeling from a cybersecurity breach in mid-August, we surmise wide-moat Clorox’s CLX 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.

However, the event stands to materially derail financial prospects for fiscal 2024, with Clorox now expecting a mid- to high-single-digit sales decline (from flat to 2% growth prior) and adjusted EPS of $4.30-$4.80 (from $5.60-$5.90). We intend to alter our outlook to align with the revised ranges, and when married with time value, we’ll likely shave a mid- to high-single-digit percentage off our $168 fair value estimate. Even with this, we still believe shares offer an attractive value, while also boasting a nearly 4% dividend yield.

Despite this unfortunate incident, we don’t surmise the firm’s competitive edge has been eroded. On the contrary, we believe 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. Importantly, Clorox continues to funnel resources behind consumer-valued innovation and marketing, with advertising amounting to 11% of sales in the quarter. This aligns with our forecast for Clorox to expend 12% of sales ($1 billion) annually toward research, development, and marketing over our 10-year explicit forecast. Further, we don’t posit this episode has extinguished its commitment to enhance its digital capabilities and streamline its operations—a $500 million investment in the next few years. We see this as a prudent means to boost its agility and push decision-making closer to the end consumer.