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Church & Dwight (CHD) Sees High Demand but Cost Woes Stay

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Church & Dwight Co., Inc. (CHD - Free Report) has been benefiting from rising consumer demand amid the pandemic. Also, the company’s online business has been strong, thanks to consumers’ increased preference for this mode of shopping. Certainly, this developer, manufacturer and marketer of household, personal care and specialty products’ focus on innovation and lucrative acquisitions has been working well. That said, costs associated with COVID-19 as well as high marketing costs pose threats to margins.  Let’s delve deeper.

Factors Working Well for Church & Dwight

The company has been gaining from rising consumer demand for its products amid the coronavirus-led crisis. This also boosted fourth-quarter 2020 results, wherein the top line improved year over year and beat the Zacks Consensus Estimate. Results continued to gain from strong demand for household and personal care products owing to consumers’ increased preference for essential items amid the coronavirus outbreak. Results were backed by continued strength in brand consumption. Incidentally, the company saw double-digit consumption gains in several domestic categories, particularly gummy vitamins, pregnancy test kits and baking soda, amid the pandemic. Also, water flossers witnessed consumption growth during the fourth quarter.

Church & Dwight Co., Inc. Price, Consensus and EPS Surprise

Church & Dwight Co., Inc. Price, Consensus and EPS Surprise

Church & Dwight Co., Inc. price-consensus-eps-surprise-chart | Church & Dwight Co., Inc. Quote

Further, the company’s international business remained strong and saw broad-based consumption increases across several countries and brands, despite pandemic-led hurdles. The company expects 2021 to be another solid year, wherein it anticipates a number of categories to continue seeing high consumption, such as gummy vitamins, laundry additives, hair growth supplements and cat litter. A number of brands are likely to gain from increased at-home grooming and self care trends amid the pandemic. Gummy vitamins have been seeing increased household penetration and management remains on track to supplement its manufacturing capacity with third-party assistance to cater to rising demand in this category. Further, the company anticipates a modest improvement in the laundry category.

Notably, Church & Dwight’s e-commerce sales in 2020 surged 60%. Online sales (as a percentage of total sales) contributed 14% to total sales in the fourth quarter and 13% to full-year 2020 compared with 8% in full-year 2019.

Will Cost Woes be Offset?

Rising costs associated with the COVID-19 pandemic as well as high tariffs pose concerns for the company. During fourth-quarter 2020, the company’s gross margin declined 280 basis points (bps) to 43% due to increased manufacturing costs, largely owing to outsourcing, pandemic-led expenses, awards to supply-chain workers and elevated tariffs. Also, marketing expenses rose 24% to $201.6 million. As a percentage of sales, it expanded 140 bps to 15.6%. The fourth quarter saw the company’s highest marketing investments, which were mainly undertaken to improve its brands.

In 2021, marketing costs are likely to rise in dollar terms, while the same is expected to contract 30 bps as a percentage of sales. Also, the company expects inflation and tariff-related concerns to stay in 2021 though these are anticipated to be countered by productivity, a decline in pandemic-led additional costs and trade promotion efficacy. Incidentally, the company expects inflation and COVID-19 costs to have an adverse impact of roughly 130 bps on gross margin. On its fourth-quarter 2020 earnings call, management said that it expects gross margin to contract year over year in the first quarter of 2021. Adjusted earnings per share are expected to be 80 cents, indicating a decline of 4% from the year-ago quarter’s figure. This indicates increased marketing spend to support product introductions.

Nonetheless, Church & Dwight estimates gross margin to expand 50 bps in 2021, with advancement expected to be more skewed toward the back half of 2021. This is likely to be backed by improved price and volume mix. SG&A expenses, as a percentage of sales, are expected to decline 20 bps. Further, adjusted operating margin is expected to expand 100 bps in 2021. Finally, adjusted earnings per share are envisioned to grow 6-8% to $3-$3.06 on higher operating income. We note that the company anticipates sales growth of 4.5% in 2021 and roughly 3% in the first quarter of 2021. Organic sales for 2021 are expected to rise nearly 3%, while for the first quarter, the metric is expected to rise nearly 2%.

All said, we believe that this Zacks Rank #3 (Hold) company’s growth story is likely to continue. Shares of the company have gained 37.2% in a year, compared with the industry’s rise of 19.2%.

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Medifast (MED - Free Report) , which currently carries a Zacks Rank #2, has a trailing four-quarter earnings surprise of 17.4%, on average.

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