Clorox (CLX) Declines Post Soft FY20 View: Is This Temporary?
Shares of The Clorox Company CLX have displayed a dismal run since reporting soft top-line results for the fourth quarter of fiscal 2019 on Aug 1 and providing a dull outlook for fiscal 2020. Most of the softness in the company’s top line was due to the ongoing headwinds in the Charcoal, and Bags and Wraps businesses. The headwinds not only dented its sales in the last three quarters but also formed the basis of its soft outlook for fiscal 2020.
Clearly, the Clorox stock has declined 0.4% since its earnings release, lagging the industry’s growth of 4.9%. Additionally, headwinds in the aforementioned businesses have led to sluggish stock performance in the year to date period. Notably, this Zacks Rank (Hold) company has gained 5.1% year to date while the industry has grown 26.1%.
The company has been witnessing operational headwinds in the Charcoal, and Bags and Wraps businesses, which are hurting the top line of the Household segment as well as the overall company. Notably, sales for the Bags and Wraps business continued to be hurt by larger price gaps as well as distribution losses. Further, the Charcoal category delivered soft sales on distribution losses and lower merchandising activity.
Although Clorox registered gross margin expansion in the fiscal fourth quarter, growth was partly negated by elevated trade spending, and manufacturing and logistics expenses. Additionally, increased spending for advertising and sales promotion partly hurt pretax earnings of its Cleaning and Household segments.
Moreover, net sales for the fiscal fourth quarter included 2 percentage points of negative impacts of foreign currency mainly due to the devaluation of the Argentine peso. Unfavorable currency marred sales for the International segment, which dropped 4% — including 15 points of negative impact of foreign currency. The company expects currency to remain a headwind in fiscal 2020.
Soft Fiscal 2020 View
Based on the continued softness in Charcoal, and Bags and Wraps categories, Clorox outlined cautious guidance for fiscal 2020. The company projects sales to be flat to up 2% in fiscal 2020, driven by gains from continued innovation, offset by currency headwinds. Driven by the likeliness that the Charcoal, and Bags and Wraps businesses will return to growth in the second half, the company projected sales in the first half of fiscal 2020 to be at the low end of the range provided for the fiscal year. Further, sales are expected to decline in the first quarter of fiscal 2020 as Clorox works to restore growth in the aforementioned categories.
Nevertheless, sales for the second half of fiscal 2020 are anticipated to be at the higher end of the range provided for the fiscal year. Meanwhile, management anticipates earnings per share of $6.30-$6.50 from continuing operations for fiscal 2020. Notably, the company expects earnings to be more muted in the first half compared with the second half as it continues to work toward improving the performance of the aforementioned businesses.
In fiscal 2020, it expects gross margin to be flat to slightly down. Excluding investments made on two strategic initiatives that should generate long-term value, gross margin is likely to be flat with the fiscal 2019 level. These investments will include the rollout of compaction of Clorox liquid bleach, beginning the second half of fiscal 2020. Further, the company expects advertising and sales promotion spending to be roughly 10% of sales. Selling and administrative expenses are projected to be nearly 14% of sales, driven by ongoing acquisition-related investments and technology transformation investments to support long-term growth and cost savings.
Long-Term Growth Prospects Intact
Despite the aforementioned headwinds, Clorox’s sound fundamentals, growth efforts and robust earnings trend speak well of its long-term prospects. It is working to turnaround the troubled Charcoal, and Bags and Wraps businesses by the second half of fiscal 2020. The company expects to lay down stronger business plans throughout fiscal 2020 to help achieve its target.
Further, Clorox's diversified brand portfolio positions it well ahead of peers to generate above-average industry growth and sustain it in the currently challenging environment. The company remains committed to investing in product and brand differentiation to safeguard value proposition through the introduction of consumer-driven innovations. It generated significant consumer value in fiscal 2019 through innovations like Hidden Valley Ready-to-Eat Dips, Brita Filtering Water Bottles, and several new Burt's Bees lip and face care products.
Its pricing and cost-saving initiatives along with investments in innovations have been aiding gross margin and earnings growth in recent quarters. In fiscal 2019, it garnered more than $120 million in cost savings, marking the 12th consecutive year of generating more than $100 million in annual cost savings. Further, the company’s cost-based pricing strategy enabled it to address the inflationary environment that persisted for over three years. These cost-saving and pricing actions should continue to support its investment in long-term brand and category growth.
Moreover, the Go Lean Strategy enabled the International segment to deliver profits despite currency woes. Though sales for the segment declined year over year, the results reflected strength with gains from price increases and volume growth across many regions. Europe and China recorded double-digit volume growth, driven by strong performance of Cat Litter and Burt's Bees. Further, in the fiscal fourth quarter, the Go Lean Strategy helped deliver six consecutive quarters of profit growth for the segment.
The above discussion clearly shows that Clorox has balanced risk-reward, with long-term growth efforts likely to offset near-term hurdles. Further, the company’s expected long-term earnings growth rate of 5% and a Growth Score of A speak well of its growth potential.
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