Clorox Posts Strong Fiscal 2012

Zacks

Clorox Corporation (CLX) posted fourth-quarter 2012 earnings per share of $1.36 compared with $1.29 earned in the prior-year quarter, up 5.4% year over year. Quarterly earnings also beat the Zacks Consensus Estimate of $1.27.

On a reported basis, including one-time items, the company reported earnings per share of $1.32 versus $1.26 reported in the year-ago quarter.

During the quarter, the company’s earnings benefited from ongoing cost-saving initiatives, price increases, higher volume, reduced advertising costs and lower tax rate, while higher employee incentive compensation, inflationary pressure in manufacturing and logistics, as well as increased commodity costs were minor deterrents.

For the full year, the company reported earnings of $4.24 per share, surpassing the year-ago earnings of $4.16 and the Zacks Consensus Estimate of $4.05.

Clorox’s net sales during the quarter grew 4% year over year to $1,541 million from $1,482 million in the year-ago quarter, driven by volume growth, price increases and contributions from new businesses acquired earlier in the year. Total revenue also surpassed the Zacks Consensus Estimate of $1,534 million.

Full-year sales increased 4.5% year over year to $5,468 million, slightly above the Zacks Consensus Estimate of $5,461 million.

Total volumes bolstered 2% year over year for both periods -- fourth quarter and fiscal 2012 -- mainly due to the strengthening of the company’s three reportable segments.

Revenue by Segment

Sales in the Cleaning segment grew 7% primarily due to 5% volume growth and higher prices, offset by an unfavorable product mix. During the quarter, the segment witnessed volume growth in its Professional Products and Home Care units, offset by lower shipments in the Laundry business.

Household segment sales increased 3% on the back of increased prices, despite a 2% decline in volumes. Lower volumes resulted from a decline in shipments in the Bags and Wraps as well as Cat Litter units.

Clorox’s Lifestyle segment recorded a 3% sales jump in the quarter compared with the base period a year ago, driven by 2% volume growth and increased pricing, partly offset by higher trade-promotion spending. The volume growth was primarily driven by double-digit shipments growth in the U.S. Natural Personal Care business and high single-digit growth in the Water Filtration business.

In the International business segment, Clorox’s sales rose 3%, benefiting from volume and sales growth in Latin America – the company’s largest international region, offset by declines in the company’s non-core export business and a double-digit volume decrease in Venezuela. Overall, sales growth in the quarter reflected a 3% rise in volumes and price increases, offset by negative foreign currency translations effects.

Margins

Clorox’s gross margin contracted 80 basis points (bps) to 42.7% from 43.5% in the year-ago quarter. Increased commodity costs, inflationary pressure-related costs in the manufacturing and logistics and employee incentive compensation more than offset the benefits from price increases and prudent cost savings, and thus drove the dip in margins.

Advertising costs, as percentage of sales, was nearly 8%, lower than the company’s forecast of 9%-10%. The decline is primarily attributable to lesser expenses in its International business, due to the economic challenges as well as the uncertainty surrounding the impact of government price controls in Venezuela and Argentina.

Balance Sheet and Cash Flow

Clorox ended the year with cash and cash equivalents of $267 million and long-term debt of $1,571 million. During the year, the company generated $620 million net cash from operations, exhibiting a decline of $70 million from the year-ago period.

In the quarter, Clorox bought back about 1 million shares for approximately $68million. Full year share repurchases summed to 3.4 million shares for about $225 million.

Guidance

Looking ahead, Clorox projects sales growth in the 2%–4% range for fiscal 2013, driven by better categories growth, market share gains and further product innovation across its brands. The company expects operating income margin to increase by 25 to 50 basis points in fiscal 2013, on the back of improved forecasts for commodity costs.

Further, Clorox guided expenditures toward systems and facilities development and other restructuring initiatives to be in the range of $50–$55 million in fiscal 2013. The company anticipates annual earnings of $4.20 to $4.35 per share in fiscal 2013. The Zacks Consensus Estimate for fiscal 2013 stands at $4.27 per share, which lies within the company’s guidance range.

Our Take

Clorox is making intensive capital investments in information technology systems and capabilities, particularly in the international market and R&D facilities to boost productivity while providing platforms for growth, product innovation and cost savings. The company believes that these initiatives will begin delivering benefits later in fiscal 2014 and beyond.

Clorox faces intense competition from other well-established consumer product companies, both in the U.S. and international markets. Most of the company’s products compete with other widely advertised brands within each product category and private label brands and generic non-branded products of grocery chains and wholesale cooperatives in certain categories, which are typically sold at lower prices. The main competitors of Clorox are Colgate-Palmolive Company (CL) and Procter and Gamble Company (PG).

Currently, Clorox has a Zacks #3 Rank, implying a short-term Hold rating. We have a long-term Neutral recommendation on the stock.

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