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Church & Dwight's International Unit Strong, Margins Soft

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Church & Dwight Co., Inc. (CHD - Free Report) has been performing well for quite some time, evident from its strong surprise record. Notably, the company marked its seventh and fourth consecutive positive earnings and sales surprise, respectively, in second-quarter 2018. The company has been gaining from strength in its consumer international business and focus on acquisitions, though increased costs have long been putting a pressure on margins.

Nonetheless, Church & Dwight’s growth drivers helped this Zacks Rank #3 (Hold) stock rally 14.2% in a year, while the industry lost 3.5% in the same time frame. Let’s analyze both sides of the story and see if the company can sustain this momentum amid cost woes.

Consumer International Business a Major Driver

The company’s consumer international business has been consistently contributing to organic sales growth. In second-quarter 2018, organic sales in the international segment jumped 6.8%, courtesy of higher volumes. Results received considerable impetus from OXICLEAN, BATISTE, and ARM & HAMMER liquid laundry detergent in the export business, ARM & HAMMER liquid laundry detergent and clumping cat litter, BATISTE in Canada, and OXICLEAN Ultra Gel and NAIR in Mexico. Well, ARM & HAMMER remains the company’s biggest international brand, which is well positioned to grow further in emerging markets.

Prior to this, organic sales grew 11.8%, 7.4%, 6.2% and 5.8% in the first, second, third and fourth quarter of 2017, respectively. In the first quarter of 2018, it increased 6.8%. Coming back to the second quarter, overall consumer international sales also remained strong, surging 21.4% on the back of recent acquisitions, broad-based sales growth for household and personal care products, and improvements in export business. The company is also opening offices in order to support its growing export business. As consumer international business remains a bright spot for the company, it continues to invest in this unit to sustain its strong sales growth.

Acquisitions Strengthen Portfolio

Church & Dwight started with only one brand, i.e. ARM & HAMMER, and since then it has acquired a number of top-ranked brands with high margins. These buyouts boosted the company’s performance, encouraging it to expect revenues of $4 billion for 2018 as compared to $1.5 billion in 2004. Further, Church & Dwight’s acquisition of Waterpik (concluded in Aug 2017) contributed significantly to its sales in the second quarter. Also, management expects sales from Waterpik to increase in high-single digits in 2018. The company's other acquisitions include Agro BioSciences in May 2017 and VIVISCAL business in January 2017. Prior to that, the acquisitions of ANUSOL and RECTINOL brands from Johnson & Johnson in December 2016 helped Church & Dwight boost its business internationally.

Strained Margins a Concern

Church & Dwight’s gross margin has been declining year over year for a while now. In second-quarter 2018, it contracted 140 basis points (bps) to 44.3% due to increased commodity and transportation expenses. Gross margin was also hurt to the tune of about 70 bps owing to impacts from a voluntary recall and an FDA authorized withdrawal related to various oral care products. Prior to this, gross margin contracted 80 bps in the first quarter of 2018. Although gross margin expanded 10 bps in the fourth quarter of 2017, the same contracted 10 bps and 80 bps in the third and second-quarter 2017, respectively. In 2018, Church & Dwight now expects gross margin to decline 120 bps, worse than an 80-bp decrease expected earlier. The company expects hurdles related to the oral care products and increased logistic expenses to lead to this decline.

The Final Word

Nevertheless, Church & Dwight’s abovementioned drivers and stable portfolio of value and premium products, launch of new and innovative products, and aggressive productivity programs are expected to keep driving the company’s performance. Incidentally, management expects solid volume growth and improved market share to drive 2018 results. The company raised its outlook when it reported second-quarter results. Now, it expects sales to surpass the earlier projection of 9% in 2018. Earnings per share is now expected to range between $2.26 and $2.28 compared with the prior estimate of $2.24-$2.28. The updated outlook reflects year-over-year adjusted earnings growth of 17-18%.

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