Can Clorox (CLX) Rebound on Pricing & Cost-Saving Efforts?
The Clorox Company CLX has been benefiting from a solid innovation pipeline, digital transformation, pricing and cost-saving efforts. CLX has been on track with its streamlined operating model, which aims to improve efficiency. Its IGNITE strategy and digital investments bode well.
Driven by these factors, the top line beat the Zacks Consensus Estimate for the fourth straight quarter in fourth-quarter fiscal 2023. Net sales grew 12% year over year, whereas the metric rose 14% on an organic basis. The increase in sales was attributed to a favorable price mix, partly offset by lower volume and unfavorable currency.
For fiscal 2024, the company envisions sales to be flat to up 2% year over year, in sync with our estimate of 0.6%. Organic sales are anticipated to increase 2-4% compared with our estimate of 2.6%.
Let’s have a look at the other factors driving the stock.
Growth Drivers
Clorox has been gaining from pricing and cost-saving initiatives, offset by elevated manufacturing and logistic costs, and higher commodity costs. This led to a year-over-year gross margin expansion of 560 bps to 42.7% in the fiscal fourth quarter. It also marked the third consecutive quarter of a gross margin expansion on the back of cost pricing and high cost savings. Consequently, the bottom-line surged 80% year over year.
For fiscal 2023, the gross margin is expected to increase 150-175 bps in fiscal 2024, driven by the combined benefits of pricing actions, cost savings and supply-chain-optimization efforts, offset by continued cost inflation. The company expects diluted earnings of $4.65-$4.95 per share for fiscal 2024. The guidance suggests a year-over-year increase of 290-315%. On a non-GAAP basis, earnings per share are anticipated to be $5.60-$5.90, suggesting growth of 10-16% from the year-ago period’s reported number and in sync with our estimate of $5.71.
Also, the company has been witnessing continued strength in the core International business as it continues to build on the success of the segment's Go Lean strategy. These efforts will help in accelerating profitable growth for the segment. The company expects to invest selectively in profitable platforms, driven by its IGNITE Strategy aimed at improving profitability in the International business.
In fourth-quarter fiscal 2023, sales of $305 million were up 4% year over year and beat our estimate of $297 million, driven by a 14-point gain from a favorable price mix, offset by a volume decline of 7 points and a 10-point impact of unfavorable currency. Organic sales for the segment improved 14%.
Moving on, Clorox is on track with the IGNITE strategy, its latest and integrated strategy, formulated on a sturdy foundation of its 2020 Strategy. This initiative mainly focuses on the expansion of the key elements under the 2020 Strategy to pace up innovation in each area of business. The IGNITE strategy encompasses the long-term financial targets of achieving net sales growth of 3-5%, an EBIT margin expansion of 25-50 bps and a free cash flow generation of 11-13% of sales.
Management announced a streamlined operating model to create a faster, simpler company through the Reimagine Work under its IGNITE strategy. The operating model 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 implementation of this new model is likely to be completed in fiscal 2024. The company expected the operating model to generate ongoing annual savings of $75-$100 million, with benefits likely to occur from fiscal 2023. Of this, it expects $40-60 million or 30 cents per share to be recognized in fiscal 2023 under other income and expenses.
As announced in August 2022, Clorox began to implement a streamlined operating model in the first quarter of fiscal 2023. The streamlined operating model is expected to enhance the company's ability to respond more quickly to changing consumer behaviors, innovate faster and increase future cash flow as a result of cost savings that will be generated primarily in the areas of selling and administration, supply chain, marketing, and research and development. Once fully implemented, the company expects cost savings of $75-$100 million annually. For fiscal 2023, year-over-year savings from this plan are likely to be $35 million compared with the previously stated $25 million.
Headwinds to Overcome
Clorox has been accelerating investments to enhance digital capabilities. In fourth-quarter fiscal 2023, selling and administrative expenses rose 35% year over year to $329 million. The metric, as a percentage of sales, expanded 280 bps from the prior-year figure at 16.3%.
Going into fiscal 2024, management expects selling and administrative expenses to be 15-16% of sales, including 1.5 points of impact of its strategic investments in digital capabilities and productivity enhancements. Management anticipates advertising and sales promotion spending to be 11% of sales, driven by its commitment to investing in its brand portfolio. For fiscal 2024, management earlier expected supply-chain inflation of $200 million.
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Consequently, shares of CLX have gained 19.6% in the past three months against the industry’s decline of 5.1%.
Conclusion
Despite rising costs and investments, we believe that this Zacks Rank #3 (Hold) is well-placed on the back of solid demand, cost-saving efforts, pricing actions, the IGNITE strategy and digital investments.
The PEG ratio for Clorox is just 2.75, a level that is lower than the industry average of 3.12. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, CLX is a solid choice on the value front from multiple angles. Topping it, a VGM Score of B speaks volumes.
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The Zacks Consensus Estimate for Flowers Foods’ current financial-year sales suggests growth of 6.7% from the year-ago
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Utz Brands Inc. UTZ manufactures a diverse portfolio of salty snacks, currently carrying a Zacks Rank #2. UTZ’s expected EPS growth rate for three to five years is 11.4%.
The Zacks Consensus Estimate for Utz Brands’ current fiscal-year sales suggests growth of 3.7% from the year-ago reported number. UTZ has a trailing four-quarter earnings surprise of 12.3%, on average.
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