Can 2020 Strategy Aid Clorox Despite Soft View & High Costs?

Shares of The Clorox Company CLX have lost 1.8% in the past three months against the industry’s growth of 8.9%. The stock’s bearish run on the bourses can be attributable to lower-than-expected third-quarter fiscal 2019 results. Elevated commodity costs, adverse currency rates, and increased manufacturing and logistics expenses hurt results to some extent. Following this, management slashed its guidance for fiscal 2019.

The company now projects sales growth of 2-3% compared with the prior guidance of 2-4%. The lowered sales view is mainly due to a milder cold and flu season compared with the prior-year quarter, and increased promotional activity in the Wipes category. The view was also lowered on anticipated softer sales in the Bags and Wraps business, due to widened price gaps as a result of price increase and higher competitive promotions. For fiscal 2019, management anticipates earnings per share of $6.25-$6.35 from continuing operations compared with the prior view of $6.20-$6.40. Notably, earnings projection includes negative impact of nearly 5-7 cents from tariffs, which are hurting certain business segments.

Although earnings estimate for this Zacks Rank #3 (Hold) company have remained stable in the past 60 days, the same for both fiscal 2019 and 2020 moved south by 0.3% and 2% to $6.29 and $6.53, respectively.  

These apart, the company’s muted gross margin view for fiscal 2019 is a concern. In fiscal 2019, the company expects gross margin to remain flat, as gains from higher prices are likely to be offset by increased costs and adverse foreign currency exchange rates.

That said, management is looking into every nook and cranny for growth prospects. In this regard, it remains poised on the smooth execution of its 2020 Strategy, which is aimed at improving categories and overall market share. The strategy focuses on achieving certain long-term aspirations like growing net sales by 3-5%, increasing EBIT margin by 25-50 basis points (bps) and generating free cash flow of 10-12% of sales, all on a yearly basis. Clorox’s 2020 Strategy is meant to be achieved through key accelerators like investment in brands, development of e-commerce, technological advancements, enhancement of growth culture, and focus on the 3Ds — desire, decision and delight.

Moreover, the company is making efforts to enhance its digital capabilities. This led to a strong performance in the e-commerce business, which is now a significant revenue contributor. The company is ahead of track and nearing its 2020 target of achieving $500 million from e-commerce sales.

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Campbell Soup Company CPB has a long-term earnings growth of 5% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

General Mills GIS has a long-term earnings growth of 7% and a Zacks Rank #2.

Vitamin Shoppe VSI has a positive earnings surprise of 319.6% in the trailing four quarters and a Zacks Rank #2.

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