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Can Clorox's (CLX) Growth Strategies Offset Margin Woes?

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The Clorox Company (CLX - Free Report) is gaining momentum on the back of its solid growth initiatives, including 2020 Strategy, Go Lean Strategy, enhancement of e-commerce business and disciplined capital allocation. However, higher costs have been denting the company’s margins, which remain a headwind moving ahead.

This Zacks Rank #3 (Hold) stock has gained 22.6% in the past six months, outperforming the industry’s 10.8% rally. Further, the company’s VGM Score of B with a long-term earnings growth rate of 7.5% drives optimism.

Let’s delve deep.

Why Strained Margins?

Higher commodity and logistics expenses, though somewhat mitigated by gains from cost savings, are denting gross margin. In fourth-quarter fiscal 2018, gross margin contracted 170 basis points (bps). Notably, it included 60 bps of unfavorable impact from costs associated with the Nutranext buyout.

Further, the company expects higher cost pressures from commodities and the transportation market to weigh on margins. For fiscal 2019, gross margin is estimated to be flat to up modestly. Although management expects to witness gross margin expansion in the second half of fiscal 2019, it is likely to remain soft in the first half owing to increased commodity expenses.

Strategic Initiatives

Clorox remains committed to its cost savings and productivity programs in a bid to reduce the ongoing cost pressures. In fiscal 2018, the company generated cost savings of more than $100 million.

Additionally, management is well on track with its Go Lean Strategy to boost margins. Its commitment toward investing in product and brand differentiation to safeguard value proposition is commendable. This apart, Clorox remains focused on strong investments in demand building, including digital marketing, e-commerce and product innovation pipeline. Internationally, the Go Lean Strategy continues to focus on improving margins through operational efficiencies.

Meanwhile, Clorox progresses well with the smooth execution of its 2020 Strategy, which is aimed at boosting improvement of categories and overall market share. The company also intends to achieve certain long-term aspirations, including net sales growth of 3-5%, EBIT margin expansion of 25-50 bps and free cash flow of 10-12% of sales, all on a yearly basis, through this strategy. These, in turn, are likely to be achieved through key accelerators like investment in brands; development of e-commerce; technological advancements; enhancement of growth culture and focus on the 3Ds - desire, decision and delight. Also, the company is ahead of track and nearing its 2020 target of $500 million from e-commerce sales.

Quarterly Performance & FY19 View

In fourth-quarter fiscal 2018, Clorox retained its impressive positive earnings streak for the seventh straight time. Though sales missed estimates in the reported quarter, it delivered sales beat in three of the trailing five quarters.

Furthermore, management issued encouraging outlook for fiscal 2019. The company projects revenue growth of 2-4% over fiscal 2018 level. The improvement will be backed by innovation which is likely to contribute nearly 3 percentage points, and combined positive effect of 2.5 percentage points from the Nutranext acquisition and Aplicare divestiture.

Earnings per share from continuing operations are envisioned in the range of $6.32-$6.52, reflecting a growth from $6.26 in fiscal 2018. Notably, earnings projection includes nearly 8-12 cents from the Nutranext acquisition. The Zacks Consensus Estimate for the fiscal year is pegged at $6.41.

Wrapping Up

While Clorox’s impressive quarterly performance, upbeat outlook and solid strategies speak volumes about the company’s prospects and growth potential, margin pressures cannot be ignored. However, we believe the gains from cost savings and productivity initiatives position the company well to offset the margin woes.

Better-Ranked Consumer Staples Stocks

Archer Daniels Midland Company (ADM - Free Report) delivered an average positive earnings surprise of 18.6% in the trailing four quarters. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Medifast, Inc. (MED - Free Report) , also a Zacks Rank #1 stock, has an impressive long-term earnings growth rate of 20%.

Calyxt, Inc. (CLXT - Free Report) is a Zacks Ranked #2 (Buy) stock. The company pulled off a positive earnings surprise in the trailing two quarters.

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