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Why Clorox Could Deliver Stock Price Growth

- By Robert Stephens, CFA

Clorox (CLX)'s increasing focus on efficiency could boost its stock price performance. The company is investing in its supply chain as it seeks to deliver cost savings of over $100 million per annum. It is also investing in its product line-up through increasing innovation. New product releases have proven successful and could improve its competitive advantage.


E-commerce growth could catalyze the company's financial future. Since it has a variety of strong brands, it may have pricing power. Investment in selective parts of its international portfolio could offset a stronger dollar.

Having gained 7% in the last year versus a 7% decline for the S&P 500, the stock could have investment appeal.

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Investment

An increasing focus on innovation and investment could boost Clorox's financial performance. It is aiming to offer increased value for consumers through the delivery of updated products such as Clorox Scentiva, Glad premium trash bags and Fresh Step Clean Paws litter. It also intends to adapt to changing customer tastes through the launch of products such as 100% hardwood briquettes in order to address customer preferences for different grilling methods. It will invest in superior product packaging which includes a wider variety of sizes as it seeks to broaden its customer base. Doing so is expected to improve the company's competitive position, with several further product introductions and enhancements due to be delivered in the next fiscal year.

It will also seek to innovate and invest in its supply chain in order to improve its operational efficiency. In recent years, Clorox has delivered over $100 million in cost savings per annum. It expects to achieve a similar level of savings in the current year and in the next fiscal year.

Strategy

Investment in digital is expected to increase so that it represents over 50% of the company's total media spend in the current year. It is producing an improved return on investment, with e-commerce becoming increasingly popular among customers. It now represents 8% of the company's total sales. On a global basis, e-commerce sales in the retail sector are forecast to rise at an annualized rate of 19.7% between now and 2021.

A refreshed pricing strategy could improve sales and margins. It has recently begun to increase the prices of a variety of its products. Since number one and number two brands in specific segments account for over 80% of its sales, its products may be relatively price inelastic due to them having strong customer loyalty. Discussions with retailers regarding further price increases continue to be constructive, which suggests that further innovation and investment in its products may be used to justify higher prices.

Risks

Clorox's international performance suffered from 12 percentage points of unfavourable foreign currency impact in the most recent quarter. This contributed to a decline in international sales of 5% versus the comparable period from the previous year. This was mainly due to the devaluation of the Argentine peso, which has weakened 50% versus the U.S. dollar in the last year. The company's gross margin was also down 150 basis points last quarter, with freight and commodity costs increasing versus the same quarter of the previous year.

Even though international sales declined in the most recent quarter, Clorox delivered total sales growth of 4%. Since only 17% of its sales were generated from international markets last year, it may not be impacted to the same extent as its sector peers by a strengthening dollar. It is seeking to invest disproportionately in margin accretive parts of its international portfolio where growth remains strong. This strategy contributed to double-digit volume growth in products such as Burt's Bees International and Renew Life Canada in the most recent quarter.

Outlook

An increasing focus on product innovation could improve Clorox's competitive advantage. It is also investing in its supply chain as it seeks to deliver cost savings in order to become more efficient.

E-commerce growth could catalyse the company's financial prospects. With a variety of strong brands, it may be able to improve margins through price rises.

Although its international performance disappointed in the most recent quarter, targeted investment has boosted the performance of a number of its international brands. Having outperformed the S&P 500 in the last year, the stock could have investment appeal.

This article first appeared on GuruFocus.