It has been about a month since the last earnings report for Clorox (CLX). Shares have added about 1.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Clorox due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Clorox Q4 Earnings Top Estimates, Soft View
Clorox reported mixed fourth-quarter fiscal 2019 results, wherein earnings beat estimates while sales lagged the same. Further, the company provided a soft view for fiscal 2020, based on continued headwinds in Charcoal, Bags and Wraps businesses.
Quarterly earnings from continuing operations of $1.88 per share grew 13% year over year and beat the Zacks Consensus Estimate of $1.85. The bottom-line improvement was mainly backed by lower tax rate, stemming from the U.S. Tax Reform and higher gross margin, partly negated by soft sales and increased expenses for advertising and sales promotion.
Net sales of $1,627 million declined 4% year over year and missed the Zacks Consensus Estimate of $1,691 million. The soft top-line result was caused by lower volume and unfavorable currency rates, particularly in Argentina. This was partially offset by gains from price increases, net of trade spending. Soft volume and currency headwinds hurt sales by 3 and 2 percentage points, respectively.
Gaining from recent price increases and cost savings, Clorox witnessed gross margin expansion of 110 bps to 45.1% in the fiscal fourth quarter. However, the aforementioned gains were partly negated by elevated trade spending, and manufacturing and logistics expenses.
Sales of the Cleaning segment rose 3% to $530 million, driven by robust performance across all businesses. The Professional Products business registered double-digit sales growth, backed by continued innovation. The Home Care business benefited from robust shipments of Clorox disinfecting wipes.
The Household segment’s sales declined 11% to $546 million mainly due to a fall in Charcoal, and Bags and Wraps businesses. Bags and Wraps sales were impacted by larger price gaps compared with the year-ago quarter as well as distribution losses. Further, the Charcoal business delivered soft sales on distribution losses and lower merchandising activity.
Sales at the Lifestyle segment were flat with the year-ago period at $312 million. Sales gains mainly reflected strong shipments of Brut’s Bees products, with continued momentum in core Lip Care and Face Care categories. These gains were backed by product innovation. Further, strength in Nutranext dietary supplement brands aided segmental sales. However, these gains were negated by lower sales in Brita.
At the International segment, sales dropped 4% to $239 million as gains from price increases and higher shipments across many regions were more than offset by 15 points of negative impact of unfavorable currency.
Clorox ended fiscal 2019 with cash and cash equivalents of $111 million, and long-term debt of $2,287 million. In fiscal 2019, the company generated $992 million of net cash from continuing operations.
Fiscal 2020 Guidance
After witnessing continued softness in Charcoal, and Bags and Wraps categories in the fiscal fourth quarter, Clorox outlined cautious guidance for fiscal 2020. The company projects sales to be flat to up 2% in fiscal 2020, driven by gains from continued innovation, offset by currency headwinds.
With regard to Charcoal, and Bags and Wraps businesses, the company expects to lay down stronger business plans throughout the year. These efforts are likely to bring these categories back on growth path in the second half of fiscal 2020. Consequently, the company projects sales in the first half of fiscal 2020 to be at the low-end of the range provided for the fiscal year. Further, sales are expected to decline in the first quarter of fiscal 2020 as the company works to restore growth in the aforementioned categories.
Nevertheless, sales for the second half of fiscal 2020 are anticipated to be at the higher end of the range provided for the fiscal year, as these two businesses are likely to return to growth during this period.
Gross margin is estimated to be flat to slightly down in fiscal 2020. The company expects nearly flat gross margin for the fiscal year, excluding investments made on two strategic initiatives that should generate long-term value. This will include the rollout of compaction of Clorox liquid bleach in the second half of 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. The company envisions effective tax rate of 22-23% for fiscal 2020.
Consequently, for fiscal 2020, management anticipates earnings per share of $6.30-$6.50 from continuing operations. Notably, the company expects earnings to be more muted in the first half compared with the second half as it continues to work toward returning Charcoal, Bags and Wraps businesses to growth.
How Have Estimates Been Moving Since Then?
Estimates review followed a downward path over the past two months.
At this time, Clorox has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Clorox has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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