Analyst Note| Erin Lash, CFA |
Church & Dwight posted impressive second-quarter sales--4.5% organic growth against 8.4% gains in the frenzied stock-up period a year ago. However, we find the degree to which stepped-up inflation ate into profits (with gross margin falling 340 basis points to 43.4%) combined with management’s repeated references to supply constraints (an inability to source raw materials from its suppliers) troubling. While we don’t deny labor shortages and sourcing are proving to be headwinds for firms across a vast array of industries, we’ve long surmised Church’s muted scale and negotiating leverage could inhibit its competitive position (hence our no-moat rating) relative to the giants it goes to bat against on a daily basis. And given this rhetoric hasn’t been pervasive among industry peers, we think these challenges could reflect Church’s subpar standing with its suppliers (which could be opting to funnel available product to larger household and personal-care operators).