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Church & Dwight (CHD) Gains on Elevated Demand, High Costs Hurt

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Church & Dwight Co., Inc. (CHD - Free Report) is well placed, courtesy of its impressive organic and online sales trends. Additionally, the company’s brand strength remains a driver, which in turn is backed by a focus on innovation and prudent buyouts. Apart from these, this developer, manufacturer and marketer of household, personal care, and specialty products has been benefiting from rising consumer demand for its products amid the coronavirus pandemic.

That being said, escalated costs pose a threat to the company’s margins. In fact, for the second quarter of 2021, adjusted earnings per share are expected to be 69 cents, indicating a decline of 10.4% from the year-ago quarter’s figure. The downside includes an adverse impact related to a voluntary product recall. Also, it reflects increased marketing spend to support product introductions.

On the brighter side, the company expects a roughly 4.5% increase in reported sales in the second quarter. For 2021, the company raised its sales outlook, when it reported first-quarter results. Management now expects reported sales growth of 5-6% compared with a 4.5% rise anticipated earlier. Incidentally, for 2021, the company continues to expect elevated demand for categories like vitamins, laundry additives and cat litter. Also, condoms, dry shampoo, power flossers and women's grooming items are likely to witness growth from the year-ago period’s level.

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Factors Backing Church & Dwight

In first-quarter 2021, earnings and sales surpassed the Zacks Consensus Estimate and the latter increased year over year. Results continued to gain from strong demand for household and personal care products amid the pandemic-led higher at-home consumption. Church & Dwight continued to witness robust consumption in the first quarter. The company saw double-digit consumption gains in several domestic categories, particularly gummy vitamins, pregnancy test kits, women’s electric grooming, battery toothbrush and toothache, amid the pandemic. Further, the company’s international business saw organic sales growth despite a number of countries undergoing lockdowns.

Notably, Church & Dwight has been witnessing organic sales growth for a while now. In the first quarter of 2021, organic sales rose 4.9%, fueled by volume gains of 3.1% and a favorable price and product mix of 1.8%. Organic sales are now expected to rise nearly 4-5% in 2021, up from about 3% growth projected earlier.  For the second quarter of 2021, organic sales are expected to rise nearly 4%. Further, Church & Dwight’s e-commerce sales have been playing a strong role amid the pandemic, backed by consumers’ accelerated online shopping preferences. During the first quarter, online sales surged 54% and formed 14.8% of quarterly sales. For 2021, the company expects online sales to form 15% of total sales.

Certainly, the company’s regular innovation helps in improving brand positions and market share in the consumer categories. Management considers innovation a major growth driver and remains encouraged about its 2021 product launches. Incidentally, it is launching OXICLEAN Laundry and Home Sanitizer, which will boost the company’s household products portfolio. In its personal care products space, VITAFUSION has introduced VITAFUSION POWER ZINC, Elderberry gummies in both adult and kids’ options, along with Super Immune Support, to make the most of consumers’ growing inclination toward boosting immunity.

Additionally, WATERPIK came up with WATERPIK ION, which is a water flosser. FLAWLESS is also set to capitalize on increased at-home beauty and self-care trends with a facial cleanser, a full body exfoliator, together with mani-pedi nail and foot care solutions. Clearly, FLAWLESS and WATERPIK have been prudent additions to Church & Dwight’s portfolio, which are also its key subsidiaries. Another noteworthy acquisition of the company includes Batiste. Also, in December 2020, the company took over Matrixx Initiatives, which owns the ZICAM brand. Markedly, Zicam is a leading zinc supplement in the United States in the vitamins, minerals, and supplements (VMS) cough/cold shortening category. Management earlier said that this buyout is likely to boost Church & Dwight’s cash earnings in 2021 by nearly 3%.

Escalated Cost Concerns

Rising costs associated with the COVID-19 pandemic as well as high tariffs pose concerns for the company. During first-quarter 2021, the company’s gross margin declined 120 basis points to 44.5% due to elevated distribution costs and increased manufacturing costs, largely due to commodities, pandemic-led expenses and elevated tariffs. Also, marketing expenses increased 2.4% to $98.7 million.

Management stated that costs of raw materials and transportation started to escalate in the first quarter of 2021 due to the Texas freeze. Consequently, it expects additional input costs of $90 million for full-year 2021. However, this is likely to be partly negated by reduced coupons and promotions, along with the planned price hikes. As a result, gross margin is expected to be flat in 2021 compared with the 2020 levels.  Further, management expects gross margin to contract 350 bps in the second quarter due to comparisons with lower promotional levels last year.

Shares of this Zacks Rank #3 (Hold) company have gained 1.6% in the past three months against the industry’s decline of 4.8%.

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