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Clorox (CLX) Dips as Q2 Earnings Lag Estimates, Lowers View

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The Clorox Company CLX reported second-quarter fiscal 2022 results, wherein the top line beat the Zacks Consensus Estimate, but the bottom line fell short of estimates. Moreover, the top and bottom lines declined year over year. Results were impacted by soft sales performance across all the segments. Lower shipment volume mainly hurt sales. This, along with higher manufacturing and logistics costs and increased commodity costs, dented the bottom line and margins.

Nonetheless, management is encouraged by the company’s portfolio, which helps it efficiently cater to the consumer demand and position it well for long-term growth. Its IGNITE strategy also appears encouraging.

The company also updated its view for fiscal 2022. While demand trends remain robust, cost savings and pricing initiatives are likely to mitigate the ongoing inflationary pressures.

Driven by the dismal fiscal second-quarter results and the soft view for fiscal 2022, Clorox’s shares declined 8.1% in the after-market session on Feb 3. Shares of the Zacks Rank #3 (Hold) company have declined 5.1% in the past three months against the industry’s 7.8% growth.

Zacks Investment Research
Zacks Investment Research

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Q2 Highlights

Adjusted earnings of 66 cents per share decreased 67% year over year and missed the Zacks Consensus Estimate of 78 cents. The earnings decline can be attributed to a decrease in sales and a lower gross margin. Adjusted earnings excluded 10 cents related to investments in the company's long-term digital capabilities and productivity enhancements.

The company posted net sales of $1,691 million, beating the Zacks Consensus Estimate of $1,678 million. The top line, however, declined 8% both year over year and on an organic basis. Sales were mainly impacted by a 10-point decline in volume, offset by a 2-point gain from a favorable price mix. Currency rates were flat with the prior year. Nonetheless, the company noted that sales increased 19% on a two-year basis.

The gross margin contracted 1,240 basis points (bps) to 33% in the fiscal second quarter. Elevated manufacturing and logistics costs, and higher commodity costs due to significant cost inflation hurt the gross margin.

The Clorox Company Price, Consensus and EPS Surprise

The Clorox Company Price, Consensus and EPS Surprise
The Clorox Company Price, Consensus and EPS Surprise

The Clorox Company price-consensus-eps-surprise-chart | The Clorox Company Quote

Segmental Discussion

Sales of the Health and Wellness segment declined 21% to $648 million, owing to soft sales across all three business units. The downside was led by an 18-point decline in the shipment volume for the Cleaning and Professional Products, and a 3-point impact from unfavorable price mix.

The Household segment’s sales improved 3% to $423 million, driven by sales growth in two of the three business units. Favorable price mix of 5 points, offset by a 2-point decline in shipment volume for the Cat Litter business, mainly aided sales. Sales increased 23% on a two-year stack basis.

Sales at the Lifestyle segment rose 2% year over year to $324 million. Growth in two of the three businesses due to a 1-point rise in volume and 1 point gain from favorable price mix aided the segment’s sales. Sales increased 11% on a two-year stack basis.

In the International segment, sales of $296 million were flat year over year as an 8-point gain from favorable price mix was fully offset by a 5-point decline in volume and a 3-point impact from unfavorable currency. Organic sales for the segment improved 3%. Sales increased 23% on a two-year stack basis.

Financials

Clorox ended second-quarter fiscal 2022 with cash and cash equivalents of $192 million, and long-term debt of $1,886 million. In the first six months of fiscal 2022, the company generated $222 million of net cash from operations.

Fiscal 2022 Guidance

Management notes that it continues to witness strong demand across its portfolio. It is also poised to gain from cost savings and pricing initiatives to mitigate the ongoing inflationary pressures. Although the company expects the cost headwinds to persist throughout fiscal 2022, it updated its fiscal 2022 view.

The company envisions a sales decline of 1-4%, both on a reported and organic basis, for fiscal 2022. It earlier anticipated a sales decline of 2-6% both on a reported and organic basis.

The gross margin is expected to decline 750 bps in fiscal 2022 compared with a 300-400-bps decline mentioned earlier. The revised gross margin guidance stems from higher-than-anticipated commodity costs, and manufacturing and logistics expenses, particularly transportation. The company continues to expect returning to gross margin growth in the fourth quarter of fiscal 2022.

Consequently, adjusted earnings for fiscal 2022 are estimated to be $4.25-$4.50 per share, down from $5.40-$5.70 per share mentioned earlier. The revised guidance suggests a year-over-year decline of 41-38% compared with a decline of 26-21% stated earlier. The company notes that adjusted earnings per share will exclude long-term investments in digital capabilities and productivity enhancements to provide greater visibility to the underlying operating performance.

On a GAAP basis, earnings per share are anticipated to be $3.80-$4.05 compared with $5.05-$5.35 stated earlier. The new guidance suggests a decline of 32-27% from the year-ago period compared with the 9-4% decline mentioned earlier.

However, the company reiterated its selling and administrative expenses, advertising and sales promotion, and effective rate view for fiscal 2022. It continues to anticipate selling and administrative expenses of 15% as a percentage of sales. The company anticipates 1% of this impact to come from the planned investments in digital capabilities and productivity enhancements.

Clorox stated that it expects to invest $90 million in long-term strategic digital capabilities and productivity enhancements in fiscal 2022. Of this, it expects $73 million (45 cents per share) to flow through to the profit and loss statement, most of which is expected to be recorded in selling and administrative expenses.

The company expects advertising and sales promotion expenses to be 10% of net sales. The higher spending mainly relates to an increase in brand investments to support its innovation pipeline and customer engagement efforts. The effective tax rate is anticipated at 22-23%.

Key Stocks to Consider

We have highlighted three better-ranked companies in the Consumer Staples sector, namely Inter Parfums IPAR, Helen of Troy HELE and Medifast MED

Inter Parfums, engaged in manufacturing, distributing and marketing a wide range of fragrances and related products, presently flaunts a Zacks Rank #1 (Strong Buy). The IPAR stock has risen 1.3% in the past three months. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Inter Parfums’ sales and EPS for the current financial year suggests growth of 63.2% and 117.4%, respectively, from the year-ago reported levels. IPAR has a trailing four-quarter earnings surprise of 29.7%, on average.

Helen of Troy, a leading consumer products player, presently sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 19.1%, on average. Shares of HELE have declined 13.5% in the past three months.

The Zacks Consensus Estimate for Helen of Troy’s sales and EPS for the current financial year suggests respective growth of 0.8% and 0.6% from the year-ago period’s reported figures. HELE has an expected EPS growth rate of 8% for three to five years.

Medifast, a leading manufacturer and distributor of clinically-proven healthy living products and programs, presently carries a Zacks Rank #2 (Buy). Shares of MED have declined 16.5% in the past three months.

The Zacks Consensus Estimate for Medifast’s sales and EPS for the current financial year suggests respective growth of 63% and 49.3% from the year-ago period’s reported figures. MED has a trailing four-quarter earnings surprise of 17.3%, on average.


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