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Clorox (CLX) Up 8% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Clorox (CLX). Shares have added about 8% in that time frame, underperforming 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 Tops Q1 Earnings & Sales Estimates, Retains View

Clorox reported first-quarter fiscal 2023 results, wherein the top and bottom lines beat the Zacks Consensus Estimate. Results benefited from solid demand for its products and brands, cost-saving efforts, strong execution and pricing actions. However, sales and earnings declined year over year. The company reiterated its view for fiscal 2023.

Adjusted earnings of 93 cents per share decreased 23% year over year but beat the Zacks Consensus Estimate of 73 cents. The earnings decline can be attributed to lower gross margin and volume, and higher selling and administrative expenses, partly negated by gains from pricing.

Net sales of $1,740 million declined 4% from the year-ago quarter but surpassed the Zacks Consensus Estimate of $1,685 million. On an organic basis, sales declined 2%. The sales decline was attributed to lower volume, partly offset by a favorable price mix.

The gross margin declined 110 bps year over year 36% in the fiscal first quarter. Elevated manufacturing and logistics costs, higher commodity costs, and lower volume offset the gains from pricing and cost-saving initiatives.

Segmental Discussion

Sales of the Health and Wellness segment declined 4% to $712 million. The downside was led by a 21-point decline in volume, offset by a 17-point gain from a favorable price mix.

The Household segment’s sales dropped 4% to $423 million. The decline in sales for the segment can be attributed to 14 points of lower volume, offset by 10 points of pricing gains.

Sales in the Lifestyle segment declined 3% year over year to $320 million. The segment was impacted by a 10-point decline in volume, offset by a 7-point gain from a favorable price mix.

In the International segment, sales of $285 million were down 1% year over year, driven by 4 points of lower volume and a 9-point impact from unfavorable currency, offset by a 12-point gain from a favorable price mix. Organic sales for the segment improved 8%.

Financials

Clorox ended first-quarter fiscal 2023 with cash and cash equivalents of $278 million, and long-term debt of $2,475 million. In first-quarter fiscal 2023, the company generated $178 million of net cash from operations.

Fiscal 2023 Guidance

For fiscal 2023, the company envisions net sales between down 4% and up 2% year over year. Organic sales are anticipated to be between down 3% and up 3%.

The gross margin is expected to increase 200 bps in fiscal 2023, driven by the combined benefits of pricing actions, cost savings and supply-chain optimization efforts, offset by continued cost inflation. The company estimates selling and administrative expenses to be 15-16% of sales, including 1.5 points of impact from its strategic investments in digital capabilities and productivity enhancements.

The company anticipates advertising and sales promotion spending to be 10% of sales, driven by the company’s commitment to investing in its brand portfolio. The effective tax rate is anticipated at 24%.

The company expects adjusted earnings of $3.85-$4.22 per share for fiscal 2023. The guidance suggests a year-over-year decline of 6% to an increase of 3%. The company expects the normalization of demand for products that witnessed peaked trends in the past two years and continued progress to rebuild gross margin in fiscal 2023. The company’s earnings view excludes long-term investments in digital capabilities and productivity enhancements of 55 cents to provide greater visibility of the underlying operating performance.

On a GAAP basis, earnings per share are anticipated to be $3.10-$3.47, suggesting a decline of 7-17% from the year-ago period’s reported number.

Business Developments

The company is on track with the streamlining of its operating model to create a faster, simpler company through the Reimagine Work under its IGNITE strategy. The operating model, which was implemented in the first quarter of fiscal 2023, will help increase efficiencies and transform the company's operations in the areas of the supply chain, digital commerce, innovation, brand building and more over the long term.

The company expects to invest $500 million in the next five years in transformative technologies and processes. These investments will include the replacement of the company's enterprise resource planning (ERP) system, and transitioning to a cloud-based platform and the implementation of a suite of other digital technologies.

Of the $500-million investment, the company will record 55% as incremental operating costs within selling and administrative expenses to be adjusted from reported EPS for purposes of disclosing adjusted EPS over the course of the next five years. Nearly 70% of these incremental operating costs will relate to the implementation of the ERP, while the remaining costs will be associated with the implementation of complementary technologies.

Earlier, the company expected the operating model to generate ongoing annual savings of $75-$100 million, with benefits likely to occur starting in fiscal 2023. The company anticipates selling and administrative expenses to be 13% of sales over time due to these changes and its ongoing productivity efforts. It is also likely to record a charge of $75-$100 million related to the new operating model over fiscal 2023 and 2024. Of this, the company expected $35 million, or 20 cents per share, to be recognized in fiscal 2023 under other income and expenses.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

The consensus estimate has shifted -14.77% due to these changes.

VGM Scores

At this time, Clorox has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Clorox has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

Clorox is part of the Zacks Soap and Cleaning Materials industry. Over the past month, Church & Dwight (CHD), a stock from the same industry, has gained 13%. The company reported its results for the quarter ended September 2022 more than a month ago.

Church & Dwight reported revenues of $1.32 billion in the last reported quarter, representing a year-over-year change of +0.5%. EPS of $0.76 for the same period compares with $0.80 a year ago.

Church & Dwight is expected to post earnings of $0.60 per share for the current quarter, representing a year-over-year change of -6.3%. Over the last 30 days, the Zacks Consensus Estimate remained unchanged.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Church & Dwight. Also, the stock has a VGM Score of D.

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