The Clorox Company (CLX Quick QuoteCLX - Free Report) released third-quarter fiscal 2017 results, wherein both top and bottom line grew year over year, and earnings marked its second consecutive beat. While earnings benefited from strong sales and reduced taxes, top line improved upon robust volume growth. Notably, Clorox’s shares increased 16.3% in the last six months, outperforming the Zacks categorized Soap & Cleaning Preparations industry’s growth of 10.3%.

Q3 Highlights

Quarterly earnings from continuing operations of $1.31 per share jumped 8% year over year and surpassed the Zacks Consensus Estimate by a penny. Results gained from solid sales, reduced tax rate and gain from sale of a global facility (that forms part of the company’s Go Lean strategy). This was partly offset by higher advertising and promotional expenses, along with gross margin contraction.

Net sales of $1,477 million advanced nearly 3.6% year over year, falling slightly short of the Zacks Consensus Estimate of $1,479 million. This marked the company’s first sales miss after four consecutive beats.

During the quarter, gains from 7% volume growth, higher pricing at the International business and benefits from RenewLife (acquired in May 2016) were somewhat negated by unfavorable mix and greater trade promotional investments.

Clorox’s gross margin contracted 130 basis points (bps) to 44% in the quarter, owing to increase in manufacturing and logistics expenses, unfavorable mix, higher commodity expenses and increased trade promotion investments, somewhat compensated by efficient cost savings and improved pricing.

Revenue by Segment

Sales in the Cleaning segment improved 7% to $497 million, with a 13% rise in volumes. Volumes mainly gained from the strength in Home Care, particularly Clorox disinfecting wipes, along with strong volumes at the Professional Products’ cleaning brands.

Household sales grew 4% to $486 million, with volumes rising 9%. Volumes were mainly aided by the RenewLife acquisition and increased shipments at Cat Litter, somewhat offset by weak Charcoal shipments owing – partly accountable to unfavorable weather.

Sales at the Lifestyle segment fell 3% to $246 million, due to 1% dip in volumes, which in turn stemmed from reduced shipments at Water Filtration and Natural Personal Care.

In the International business segment, sales grew 3% to $248 million. However, volumes dropped 2%, mainly on account of softness in certain Latin American countries, especially Argentina. This was partly compensated by strength noted in Canada (including benefits from Renew Life’s buyout).

Financials

Clorox ended the quarter with cash and cash equivalents of $431 million, and long-term debt of $1,390 million. On a year-to-date basis, the company generated $483 million of net cash from continuing operations compared with $436 million in the year-ago period.

Looking Ahead

Clorox remains impressed with its sales and volume growth in the quarter, which was backed by robust innovations. Also, the company is on track with growth at its international business, and its Go Lean strategy. While the third quarter was marked by intense advertising and promotion investments, to enhance brand value, it is likely to boost sales and volumes in fourth-quarter fiscal 2017. Also, the company envisions EBIT margin to improve in the fourth quarter backed by lower selling and administrative costs.

All said, management remains confident of delivering another year of top and bottom-line growth. However, currency is expected to have some adverse impact on the top line. Considering all factors, the company revised its fiscal 2017 outlook.

The company continues to expect fiscal 2017 sales growth in a range of 3–4%, driven by sales gains witnessed year to date, as well as nearly 2 points gains from the RenewLife buyout. This is expected to be partly offset by an adverse currency impact of 1 point.

Further, EBIT margin is now estimated to expand by 25 bps, compared to 25–50 bps forecasted earlier. This will be mainly backed by lower selling and administrative costs, as a percentage of sales, somewhat countered by reduced gross margin in fiscal 2017.

Finally, the company adjusted its earnings forecast for fiscal 2017 to $5.25–$5.35 per share from $5.23–$5.38 expected earlier. This reflects year over year growth of 7–9%.  This forecast incorporates gains from strong year-to-date sales growth, product innovations and projections for EBIT margin expansion in the fiscal.
 
Zacks Rank & Key Picks

Clorox currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the same industry include Unilever Plc (UL Quick QuoteUL - Free Report) , sporting a Zacks Rank #1 (Strong Buy) and Unilever N.V. with a Zacks Rank #2 (Buy). Another stock worth considering in the consumer staples sector is Ollie's Bargain Outlet Holdings Inc. (OLLI Quick QuoteOLLI - Free Report) , flaunting a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Unilever Plc, with a long-term EPS growth rate of 5.8%, has witnessed positive estimate revisions for 2017, in the last 30 days.

Unilever N.V., with a long-term EPS growth rate of 9.6%, flaunts a VGM Style Score of “B”.

Ollie's Bargain has to its credit a spectacular earnings history as the company delivered an average positive earnings surprise of 16.8% in the past four quarters. Moreover, its long-term EPS growth rate of 17.1% bodes well.

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