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Clorox (CLX) Down 6% in 6 Months: Can Efforts Aid Recovery?

Zacks Equity Research

The Clorox Company CLX is navigating through rough waters right now. Notably, the company is grappling with elevated commodity costs, adverse currency rates as well as increased manufacturing and logistics expenses. All these factors impacted the third quarter, wherein earnings and revenues missed the Zacks Consensus estimates. Also, it lowered its outlook for fiscal 2019. (Read: Clorox Q3 Earnings & Sales Miss Estimates)

In the past six months, this Oakland, CA-based company declined 6%, against the industry’s growth of 14.2%. Let’s take a look at what’s ailing the company’s performance.

Reasons Behind Clorox’s Dismal Run

Clorox is witnessing high input cost and adverse currency fluctuations. The company’s significant international presence exposes it to major foreign currency risks which have been weighing on its performance. Apparently, net sales of fiscal third quarter included 3 percentage points of negative impacts from foreign currency, mainly due to the devaluation of Argentine peso.

Sales of the international segment declined 5% mainly as benefits of Go Lean strategy executions, including pricing and cost-savings initiatives, were significantly offset by unfavorable foreign currency impact of about 18 points. Moreover, the company expects currency to remain a headwind in fiscal 2019.

The company expects gross margin to remain flat in fiscal 2019 as gains from higher prices and cost-savings efforts are likely to be offset by increased costs and adverse foreign currency exchange rates. Further, it expects advertising and sales promotion spending to be roughly 10% of sales. Selling and administrative expenses are projected to be nearly 14% of sales.

For fiscal 2019, the company projects sales growth of 2-3% compared with prior guidance of 2-4%. The softer sales view is mainly due to a milder cold and flu season compared with the prior-year quarter, as well as increased promotional activity in the Wipes category. The lowered sales view is also related to expectations of softer sales in Bags and Wraps business, owing to widened price gaps as a result of price increase and higher competitive promotions.

Management anticipates earnings per share of $6.25-$6.35 from continuing operations for fiscal 2019 compared to prior view of $6.20-$6.40. Earnings projection includes negative impact of nearly 5-7 cents from tariffs, which are hurting certain business segments.

Can Efforts Aid Revival?

Clorox is on track with its 2020 Strategy, which is aimed at driving growth at product categories and enhancing overall market share. The strategy focuses on increasing net sales by 3-5%, expanding EBIT margin by 25-50 basis points and generating free cash flow of 10-12% of sales, all on a yearly basis. Markedly, the 2020 Strategy is expected to be achieved through key accelerators like investment in brands; development of e-commerce; technological advancements; enhancement of growth culture and focus on the 3Ds - desire, decision and delight.

Moreover, the company remains keen on making strategic partnerships with retail customers and evolving capabilities in both physical world and online. As a result, Clorox witnessed an improvement in digital capabilities leading to a strong performance in e-commerce, which is now a significant revenue contributor. Notably, it is ahead of its plan to achieve $500 million from e-commerce sales by 2020.

The company’s approach toward brand management allows each of its brands to develop further through rigorous research and development, marketing strategies, financial control and operating leverage. Management is focused on making investments in demand building including digital marketing, e-commerce and product innovation pipeline.

We believe the aforementioned factors to provide cushion to this Zacks Rank #3 (Hold) stock and help it win back investors’ confidence.

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