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Church & Dwight (CHD) Gains on Organic Sales Amid High Costs

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Church & Dwight Co., Inc. (CHD - Free Report) has been benefiting from robust online sales, especially amid the pandemic. Also, elevated demand for household and personal care products due to increased stay-at-home trends has been driving organic sales. Additionally, the company’s efforts to strengthen brands through innovation and buyouts have been yielding results.  That being said, the company has been grappling with cost-related challenges. Let’s delve deeper.

What’s 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 first-quarter 2021 results, wherein earnings and sales surpassed the Zacks Consensus Estimate and the latter increased year over year.  Also, organic sales rose 4.9%, fueled by volume gains of 3.1% and a favorable price and product mix of 1.8%. 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, the company began 2021 on a robust note and expects it to be another solid year. Management raised its sales outlook and now expects reported sales growth of 5-6% compared with a 4.5% rise anticipated earlier. For the second quarter of 2021, the company expects roughly a 4.5% increase in reported sales. In 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.  On its last earnings call, management stated that organic sales are 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 grow about 4%.

Additionally, Church & Dwight’s e-commerce sales have been playing a strong role amid the pandemic, backed by consumers’ accelerated online shopping preferences. During first-quarter 2021, online sales surged 54% and formed 14.8% of quarterly sales. For 2021, the company expects online sales to form 15% of total sales.

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The Barriers

Rising costs associated with the COVID-19 pandemic and higher 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. 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.

Shares of the Zacks Rank #3 (Hold) company have slipped 1.8% in the past three months against the industry’s rise of 0.8%.

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