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Why Is Church & Dwight (CHD) Down 9.4% Since Last Earnings Report?

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A month has gone by since the last earnings report for Church & Dwight (CHD). Shares have lost about 9.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Church & Dwight due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Church & Dwight Q4 Earnings Match Estimates, Sales Up Y/Y

Church & Dwight reported fourth-quarter 2020 results. The company posted adjusted earnings of 53 cents per share, in line with the Zacks Consensus Estimate. The figure, however, declined 3.6% from the year-ago quarter’s level. We believe that the bottom line was hurt by lower gross margin and higher marketing expenses.

Net sales of $1,295.3 million advanced 13.2% year over year and surpassed the Zacks Consensus Estimate of $1,262.6 million. Results were backed by continued strength in brand consumption. Incidentally, the company saw double-digit consumption gains in several domestic categories, particularly gummy vitamins, pregnancy test kits and baking soda, amid the pandemic.  Also, water flossers witnessed consumption growth in the fourth quarter. Morevover, the company’s international business remained strong and saw broad-based consumption increases across several countries and brands despite the pandemic-led hurdles. Organic sales rose 10.8%, fueled by volume gains of 10.3% and a favorable price and product mix of 0.5%. Organic sales growth surpassed management’s guidance of 8% growth.

Gross margin declined 280 basis points (bps) to 43% due to increased manufacturing costs, largely owing to outsourcing, pandemic-led expenses, awards to supply-chain workers and elevated tariffs. Marketing expenses increased 24% to $201.6 million. As a percentage of sales, it expanded 140 bps to 15.6%. The fourth quarter saw the company’s highest marketing investments, which were mainly undertaken to improve its brands. However, adjusted SG&A expenses, as a percentage of sales, contracted 70 bps as an increase in sales outperformed investments.

Segment Details

Consumer Domestic: Net sales in the segment rose 13.8% to $990.9 million on higher household and personal care sales, as well as gains from buyouts. Organic sales improved 11%, driven by volume growth and higher price and product mix. The segment mainly benefited from strong consumption. Organic sales growth was led by brands like VITAFUSION and L’IL CRITTERS gummy vitamins, ARM & HAMMER liquid laundry detergent, WATERPIK oral care products, OXICLEAN stain fighter powder, ARM & HAMMER clumping cat litter and baking soda, VIVISCAL hair thinning, and KABOOM bathroom cleaners.

Consumer International: Net sales in the segment increased 16.2% to $228.5 million. Organic sales improved 14.9% on higher volumes and a favorable price and mix. Organic sales gained from the strength in WATERPIK, NAIR, VITAFUSION and OXICLEAN in the Global Markets Group; FLAWLESS and WATERPIK in Australia, and FLAWLESS women’s hair removal in Canada, among other brands.

Specialty Products: Sales in the segment dipped 1.2% to $75.9 million, mainly due to the non-dairy segment. Also, organic sales went down due to lower volumes, somewhat compensated by better pricing. However, volumes improved from the preceding quarter, with milk prices remaining stable.

Other Financial Updates & Outlook

Church & Dwight ended the quarter with cash on hand of $183.1 million and total debt of $2,163.9 million. For 2020, cash flow from operating activities was $990.3 million and the company incurred capital expenditures of $98.9 million. Additionally, the company hiked its regular dividend by 5.2%, taking it to 25.25 cents per share, which amounts to an annualized rate of $1.01. The raised dividend will be payable on Mar 1, 2021, to stockholders of record as of Feb 16. Notably, this marks the company’s 25th straight year of a dividend hike. Also, as part of the company’s Evergreen Share Repurchase Program, management, in December 2020, entered into an accelerated share buyback deal with a commercial bank to buy shares worth $300 million. The purchase period is expected to close during the first quarter of 2021. These actions reflect the company’s robust cash flows as well as commitment toward shareholders.

The company forecasts 2021 to be another solid year, wherein it anticipates a number of categories to continue seeing high consumption, such as gummy vitamins, laundry additives, hair growth supplements and cat litter. Gummy vitamins have been seeing increased household penetration and management remains on track to supplement its manufacturing capacity with third-party assistance to cater to rising demand in this category. Further, the company anticipates a modest improvement in the laundry category. Other categories like baking soda, toothache and pregnancy kits, however, are likely to be lower than their 2020 highs.  

Additionally, management remains encouraged about its 2021 product launches in several categories, which is likely to drive growth. International investments have also been paying off. Further, Church & Dwight expects the Specialty Products business to deliver a stronger year, on the back of the balanced dairy and non-dairy businesses. The company anticipates sales growth of nearly 4.5% in 2021, while organic sales are expected to rise nearly 3%. Church & Dwight expects gross margin to advance 50 bps, with advancement expected to be more skewed toward the back half of 2021. Inflation and tariffs are anticipated to be countered by productivity, lower pandemic-led additional costs and trade promotion efficacy. Marketing costs are likely to rise in dollar terms, while the same is likely to contract 30 bps as a percentage of sales. SG&A expenses, as a percentage of sales, are expected to decline 20 bps. Consequently, adjusted operating margin is expected to expand 100 bps in 2021. Finally, adjusted earnings per share are envisioned to grow 6-8% to $3-$3.06, on the back of higher operating income.

For the first quarter of 2021, the company projects roughly a 3% increase in sales, while organic sales are expected to rise nearly 2%. Further, management expects gross margin to contract year over year. Adjusted earnings per share are estimated to be 80 cents, calling for a decline of 4% from the year-ago quarter’s figure. This reflects increased marketing spend to support product introductions.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -5.23% due to these changes.

VGM Scores

Currently, Church & Dwight has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. 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, Church & Dwight has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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