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Bear of the Day: Clorox (CLX)

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The Clorox Company (CLX - Free Report) is getting hit by higher costs just as demand for its cleaning and filtration products moderates. This Zacks Rank #5 (Strong Sell) recently lowered full year guidance.

Clorox makes consumer products with well-known brands such as Clorox bleach and cleaning products; Pine-Sol cleaners; Liquid-Plumr clog removers; Glad bags and wraps; Hidden Valley dressings and sauces; Brita water-filtration products; Burt's Bees natural personal care products; and multiple vitamins, minerals and supplements.

It also sells to the professional customer under CloroxPro and Clorox Healthcare brand names.

A Big Beat in the Fiscal Third Quarter

On Apr 30, Clorox reported its fiscal third quarter results and blew by the Zacks Consensus Estimate by $0.15. Earnings were $1.62 versus the Consensus of $1.47.

Sales were flat in the quarter, however, compared with a 15% increase seen the year before as consumers rushed out to stock up on home cleaning supplies at the start of the pandemic in March 2020.

In the Health & Wellness segment, which includes cleaning, professional products and vitamins and supplements, sales fell 8%.

Sales declined in two of three businesses within the segment. The decrease was mainly due to lower shipments of cleaning and disinfecting products in both the retail and professional channels in comparison to unprecedented growth in the year-ago period as the COVID pandemic broke out, as well as supply constraints for some key products.

In the Household segment, which includes bags and wraps, grilling and cat litter, sales rose 6%.

This segment actually benefited from consumers spending more time eating at home versus the year ago period.

In the third segment, Lifestyle, which includes food, water filtration and natural personal care, sales were flat, with food doing well as more people ate at home but water filtration took a hit as it had a tough year-over-year comparable as consumers stocked up on water filtration as the pandemic hit a year ago.

Clorox's third-quarter gross margin fell 320 basis points to 43.5% from 46.7% in the year ago quarter.

The decrease in gross margin, the first contraction in 10 quarters, was the result of higher manufacturing and logistics costs along with increased commodity costs, partially offset by lower trade promotion spending and the benefit of cost savings initiatives.

Clorox Cuts Its Full Year Guidance

Clorox admitted that gross margin was now expected to be down on the year, reflecting higher commodity and manufacturing and logistic costs.

It cut its full year earnings guidance to a range of $7.45 to $7.65.

The analysts followed suit, with 5 estimates cut for fiscal 2021 in the last week.

It has pushed the Zacks Consensus down to $7.83 from $8.25 previously.

That's still earnings growth of 6.4% as it made $7.36 a year ago. The company is looking for 1% to 4% growth.

Analysts are bearish on fiscal 2022 as well, however.

4 estimates were cut for next year, pushing down the Zacks Consensus to $7.67 from $7.89. That's an earnings decline of 2%.

Shares Have Sunk the Last 6 Months

Clorox was one of the hot, pandemic winners for the first few months of the pandemic.

But over the last 6 months, shares are down 14% while the S&P 500 has gained 24.4%.

Are shares a deal?

Clorox shares aren't cheap, despite the share weakness, with a forward P/E of 23.1.

The company has always been shareholder friendly, and pays a dividend currently yielding 2.5%.

But with rising commodity costs certain to continue to be an issue for the next several months, it may be best for investors to wait on the sidelines for a better entry point.

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