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Solid Brands Aid Church & Dwight (CHD), High Cost a Worry

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Strength in brand portfolio, courtesy of innovations and strategic acquisitions, is working favorably for Church & Dwight Co., Inc. (CHD - Free Report) . The company’s pricing actions and online sales are aiding growth. That being said, escalated costs and supply-chain challenges have been hurdles.

Let’s delve deeper.

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Portfolio Strength Aids Growth

The Zacks Rank #3 (Hold) company boasts power brands, representing most of its consumer sales. In the first quarter of 2022, seven of its brands, including ARM & HAMMER Scent Boosters, ARM & HAMMER Baking Soda, ARM & HAMMER Clumping Litter, BATISTE dry shampoo, WATERPIK Water Flossers, ZICAM zinc supplements and THERABREATH mouthwash, witnessed double-digit consumption growth. Its recently-acquired ZICAM and THERABREATH have been performing well, driven by increased market share and distribution.

CHD remains focused on product innovation for further growth. The company launched the VITAFUSION brand’s 2 in 1 Bi-Layer Gummies. The ZICAM brand is on track with launching the first immune supplement gummies for day and night, which comes with the benefit of Zinc + Vitamins C&D. The TROJAN brand is likely to introduce two condoms, TROJAN ULTRAFIT and TROJAN BARESKIN RAW. Other notable launches include Leave-in Hair Mask by BATISTE for moisture and nourishment without any rinsing, FLAWLESS Bikini line in sync with At-Home Beauty and self-care trends and THERABREATH’s Whitening Rinse. The company also announced a new segment with ARM & HAMMER Baby Hypoallergenic Detergent. The product comes with zero preservatives, phosphates or dyes. It is also gentle on baby’s skin and EPA Safer Choice certified. In another development, the company is expanding ARM & HAMMER Forever Fresh Clumping Cat Litter to include the use of Essential Oils to provide long-lasting odor control and freshness.

Church & Dwight has a long history of successful acquisitions. In December 2021, it acquired TheraBreath, a leading brand in the mouthwash category, marking the company's 14th power brand. In its last earnings call, management highlighted that TheraBreath delivered 37% consumption growth in the first quarter of 2022. We note that the buyout of FLAWLESS and WATERPIK have been prudent additions to Church & Dwight’s portfolio, which have been doing very well.

What Else is Aiding Growth?

Church & Dwight resorted to incremental pricing across its portfolio to counter rising costs. A favorable price was an upside to the company’s organic sales in the first quarter of 2022. In its last earnings call, management highlighted that during early 2022, it has already undertaken price increases covering 80% of the global portfolio amid an inflationary environment. The company undertook another round of price increases for its Fabric Care and Litter products, which will likely come into effect in July 2022.

Another factor working for Church & Dwight is the e-commerce channel. During the first quarter, the company’ online sales, as a percentage of total sales, came in at 16%, up 2.6% year over year. Management expects online sales for 2022 to be over 15%, as a percentage of total sales.

Cost Hurdles To Stay

Church & Dwight has been witnessing a shrinking gross margin for the past few quarters. During first-quarter 2022, Church & Dwight’s gross margin contracted 190 basis points (bps) to 42.6% due to the adverse impacts of increased manufacturing costs, net of pricing, productivity and favorable mix.

In 2022, the company expects to witness additional cost inflation of $85 million related to higher oil and transportation costs than that mentioned in January. It is on track to offset inflation via price increases, laundry concentration and productivity efforts. However, management expects to face inflation at a greater rate than effective price increases in 2022.

For 2022, the gross margin is likely to be down from the 2021 reported level due to inflation, which is anticipated to more than offset pricing and productivity benefits. Further, the gross margin is likely to contract 200 bps year over year in the second quarter of 2022, as it continues to witness escalated inflation, surpassing the latest round of price increases.

The company’s stock has declined 15.8% in the past three months compared with the industry’s 9.2% fall.

3 Solid Staple Stocks

Some better-ranked stocks are Pilgrim’s Pride (PPC - Free Report) , Sysco Corporation (SYY - Free Report) and United Natural Foods (UNFI - Free Report) .

Pilgrim’s Pride, which produces, processes, markets and distributes fresh, frozen and value-added chicken and pork products, sports a Zacks Rank #1 (Strong Buy). PPC has a trailing four-quarter earnings surprise of 31.4%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Pilgrim’s Pride’s current financial year EPS suggests growth of 63.2% from the year-ago reported number.

Sysco, which engages in marketing and distributing various food and related products, carries a Zacks Rank #2 (Buy). SYY has a trailing four-quarter earnings surprise of 9.1%, on average.

The Zacks Consensus Estimate for Sysco’s current financial year sales and EPS suggests growth of 32.6% and 124.3%, respectively, from the year-ago reported number.

United Natural Foods distributes natural, organic, specialty, produce and conventional grocery and non-food products. UNFI currently carries a Zacks Rank #2.

The Zacks Consensus Estimate for UNFI’s current financial year sales and EPS suggests growth of 7.2% and 4.9%, respectively, from the year-ago period’s reported figures. United Natural Foods has a trailing four-quarter earnings surprise of 29.9%, on average.