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Clorox (CLX) Down 9% in 3 Months: Can Efforts Aid Revival?

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The Clorox Company CLX stock has been hurt owing to headwinds in the Charcoal, and Bags and Wraps businesses. Investor sentiment for the stock was further hurt by first-quarter fiscal 2020 results, which were impacted by higher trade promotional spending, unfavorable mix, higher manufacturing and logistics costs, and adverse currency. Elevated costs remain an added concern. Moreover, the company reiterated its recently lowered view for fiscal 2020, based on revised assumptions for currency rates.

For fiscal 2020, the company projects sales between low single-digits decline and up 1%, including currency headwinds. Furthermore, it anticipates sales in the first half of fiscal 2020 to be lower than the second half, due to its ongoing efforts to navigate through the challenges in Bags and Wraps, and Charcoal. Due to higher cost, gross and EBIT margins are estimated to be slightly down in fiscal 2020. Also, management anticipates earnings per share of $6.05-$6.25 for fiscal 2020.

A glimpse at this Zacks Rank #4 (Sell) stock’s price performance reveals that it has underperformed the industry in the past three months. Shares of this Oakland, CA-based company have lost 9.4%, wider than the industry’s 4.6% decline.

Reasons for Clorox’s Dismal Run

Clorox has been witnessing operational headwinds in the Charcoal, and Bags and Wraps businesses, which are hurting the top line of the Household segment as well as the overall company. Notably, the Household segment reported sales decline of 14% in first-quarter fiscal 2020 while the company’s net sales fell 4%. Bags and Wraps sales declined double digits owing to larger price gaps compared with the year-ago quarter as well as distribution losses in certain portions of the portfolio. Meanwhile, the Charcoal business delivered double-digit sales decline on lower shipments and increased trade promotional spending to manage inventory levels before the 2020 grilling season. With revival efforts underway, the company expects to bring these categories back on track in the second half of fiscal 2020.

Unlike most of its peers, Clorox witnessed gross margin expansion in the fiscal first quarter. However, growth was partly negated by 180 basis points (bps) impact of elevated trade promotion spending, and higher manufacturing and logistics expenses. Moreover, higher trade promotion spending hurt pre-tax earnings of the Household segment. While selling and administrative expenses remained flat on a year-over-year basis, it increased 40 bps to 14%, as a percentage of sales, due to reduced operating leverage. Further, advertising and sales promotion investments, as a percentage of sales, were nearly flat in the fiscal first quarter, while spending for the U.S. retail business was 10% of sales.

In fiscal 2020, advertising and sales promotion spending is anticipated to be roughly 10% of sales. Selling and administrative expenses are projected to be nearly 14% of sales, driven by ongoing acquisition-related investments and technology transformation investments to support long-term growth and cost savings.

Can Efforts Aid Revival?

Clorox recently introduced IGNITE, its latest and integrated strategy, formulated on a sturdy foundation of its 2020 Strategy. This new initiative mainly focuses on the expansion of the key elements under the 2020 Strategy to pace up innovation in each area of business. As a result, the company will be able to drive overall growth and reinforce competitive advantage, hence boost shareholder value.

Backed by the IGNITE strategy, the company remains on track with its cost-saving and productivity initiatives. It aims at higher cost savings annually by emphasizing more on technology and integrated design. With this, it expects to achieve EBIT margin expansion of 175 bps annually. Further, the company’s cost-based pricing strategy has enabled it to address the inflationary environment that has persisted for over three years. These cost-saving and pricing actions should continue to support its investment in long-term brands and category growth. In the fiscal first quarter, Clorox witnessed gross margin expansion of 60 bps, driven by 180 bps of benefit from cost savings and 120 bps from pricing. By the end of fiscal 2020, the company expects to surpass its annual cost savings target of 150 bps, supported by meaningful productivity improvements.

Apart from these, the company is witnessing strong progress in the core International business as it continues to build on the success of the segment's Go Lean strategy. These efforts will help in accelerating profitable growth for the segment. While sales for the International segment remained flat year over year, it demonstrated strong volume growth, innovation and benefits of price increases, which offset the currency headwinds. Moreover, organic sales for the segment rose 8%, driven by strong gains in Latin America and Asia. Driven by its IGNITE Strategy, which aims to improve profitability in International business, the company expects to invest selectively in profitable platforms. These investments are likely to result in improved returns from businesses like Burt's Bees and Cat Litter.

We believe the aforementioned factors should benefit company’s performance and help it win back investors’ confidence.

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