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Clorox (CLX) Stock Loses Sheen: What's Hindering its Growth?

Zacks Equity Research

Bogged down by weak third-quarter fiscal 2019 performance coupled with elevated costs and adverse currency fluctuation, The Clorox Company CLX has been losing sheen of late. Although the stock has gained 1.8% year to date, it largely underperformed the industry’s rally of 20.9%.

In the fiscal third quarter, Clorox’s earnings missed the Zacks Consensus Estimate, after delivering a beat for nine straight quarters. Moreover, sales lagged the consensus mark, marking third miss in the trailing four quarters. Results were impacted by higher commodity costs, adverse currency rates as well as increased manufacturing and logistics expenses. Consequently, management narrowed guidance for fiscal 2019.

The company projects sales growth of 2-3% compared with 2-4% anticipated earlier. Lowered sales view can be primarily attributed to a milder cold and flu season compared with the prior-year quarter as well as increased promotional activity in the Wipes category. Also, expectations of softer sales in Bags and Wraps business due to widened price gaps as a result of price increase and higher competitive promotions induced Clorox to trim its sales guidance.

For fiscal 2019, management anticipates earnings per share of $6.25-$6.35 from continuing operations versus its prior view of $6.20-$6.40. Notably, earnings projection includes negative impact of nearly 5-7 cents from tariffs, which are hurting its certain business segments.

The aforementioned expenses are also somewhat weighing on the company’s margins. Apparently, the company expects gross margin to remain flat in the fiscal year as gains from higher prices and cost-savings efforts are likely to be offset by increased costs and adverse foreign currency exchange rates. It also expects advertising and sales promotion spending to be roughly 10% of sales. Selling and administrative expenses are projected to be nearly 14% of sales.

In fact, this Zacks Rank #4 (Sell) stock has lost 1.3% in the past month, whereas the industry grew 4.2%.

Is There Any Silver Lining?

While these limitations make us quite apprehensive, Clorox’s focus on 2020 Strategy gives investors a reason to cheer. The company remains keen on the smooth execution of its 2020 Strategy, which is aimed at the improvement of categories and overall market share. The strategy focuses on achieving certain long-term aspirations including net sales growth by 3-5%, EBIT margin expansion by 25-50 basis points (bps) and free cash flow generation of 10-12% of sales, all on a yearly basis.

Notably, this 2020 Strategy is meant 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.

In response to the changing retail environment, Clorox is keen on making strategic partnerships with retail customers and evolving capabilities not only in the physical world but also online. Notably, the company is ahead of track and nearing its 2020 target of $500 million from e-commerce sales.

3 Better-Ranked Stocks in the Same Space

Celsius Holdings, Inc. CELH delivered a positive earnings surprise of 66.7% in the last reported quarter. The company has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Church & Dwight Co., Inc. CHD came up with with average trailing four-quarter earnings beat of 4%. It currently carries a Zacks Rank of 2.

The Procter & Gamble Company PG, also a Zacks Rank #2 stock, outpaced the earnings estimates in each of the trailing four quarters, the average being 3.1%.

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