The Clorox Company Disinfects Its Outlook

Price Hikes Push The Clorox Company Higher 

The Clorox Company NYSE: CLX is a poster child for both the pandemic and post-pandemic worlds. The company saw a 500% increase in demand for its products that outpaced expectations during both the spike and decline that has shares trading at their lowest levels in nearly a year. But that story is changing. While the company is feeling the impact of lower demand and higher input costs it has a plan to restore margins and return to earnings growth. Price hikes. Price hikes will begin taking effect as soon as the current quarter and promise to improve margins as much as 600 basis points between the recently reported fiscal 1st quarter of the year and the last. That’s good news for shareholders, the dividend, and share prices. 

"We're off to a solid start in fiscal year 2022 and saw stronger-than-anticipated demand across our portfolio, despite a challenging operating environment. We made meaningful progress on restoring supply — which contributed to holding or gaining market share in the vast majority of our businesses — and we're pulling multiple levers to manage through this inflationary period. This includes pricing actions and stepping up our cost reduction initiatives, which will help us rebuild margins and create fuel to reinvest in the business," said CEO Linda Rendle.

Solid Quarter Lifts The Clorox Company 

The Clorox Company really had a great quarter that was marred by only one thing, a severe contraction in the margin. The company reported $1.82 billion in consolidated revenue which is down 6.0% from last year but up 21% from 2019 and beat the consensus by 640 basis points. The revenue was driven by a -5% decline in organic sales that was compounded by a -1% headwind from FX. The organic sales decline was caused by a 2% decline in volume coupled with a 3% impact from price/mix. On a segment basis, small increases in International and Lifestyle sales were offset by double-digit declines in Health and Household sales. 

Moving down to the margin and earnings is where this quarter’s report turns ugly but there is a light at the end of the tunnel. The company reported a 1090 basis point decline in gross margin, nearly 11% percentage points, due to rising commodity, manufacturing, and logistics costs. This sparked a near 70% decline in GAAP and adjusted earnings but, due to revenue strength and pricing efforts, less than expected. The $1.14 in GAAP earnings beat by $0.12 while the $121 in adjusted earnings beat by $0.19. 

As bad as the margin decline is, the key news of the report is the guidance. The company is expecting revenue to decline only -2.0% to -6.0% compared to the previous range with the second-half outlook far superior to the first. The company is expecting deep declines in revenue and earnings in the first half to be offset by a return to margin expansion and earnings growth in the second half. The company is calling for a full-year gross margin decline in the range of 300 to 400 basis points with growth returning in the 4th quarter. Full-year adjusted EPS should come in a range of $5.40 to $5.70 compared to the Marketbeat.com consensus estimate of $5.52. 

The Technical Outlook: Clorox Confirms Support, Reversal Is In The Works 

Shares of The Clorox Company surged more than 5.0% following the fiscal Q1 earnings report and appear to be forming a reversal. Not only is price action surging from support but it is above the short-term moving average and confirmed by the indicators as well. Assuming the market can follow through with this move we see shares of The Clorox Company move up to the $170 and then the $180 level by the end of the year. Assuming the next quarter’s results are in line with the positive outlook, shares of Clorox should continue higher well into 2021.