The Clorox Company Got Sanitized, Now Is The Time To Buy

The COVID-19 Bump Is Over For The Clorox Company

The Clorox Company NYSE: CLX made big waves last year in the wake of the COVID-19 pandemic. The company's products became the go-to brand for at-home and institutional sanitation needs and store shelves were wiped clean. The company reported a 500% increase in demand that had production backed up for several quarters but that was then. The Clorox Company made big waves this year when it reported fiscal Q4 earnings and revealed the COVID bump all but disappeared. Shares fell in the wake of the report and have the stock trading at a one-year low that we see as buyable. While the COVID bump has dissipated, the company’s IGNITE strategy has sales up 13% in the 2-year comparison and is on track for long-term sustainable growth. 

Receding Demand And Higher Costs Drive Clorox Q4 Results

The Clorox Company had a good quarter when viewed from the long-term perspective, the problem for share prices is that the Q4 results are incredibly weak in light of recent trends.  While the $1.80 billion in net consolidated revenue is up 13% in the 2-year stack, revenue is down sequentially and nearly 10% from last year's peak. On an organic basis, sales did fall 10% over last year but were offset slightly by acquisition in the international segment. 

On a segment basis, three of the four operating segments posted net declines and that would have been 4 out of 4 if not for the acquisition of a joint venture in Saudi Arabia. The health and wellness segment, which includes the flagship Clorox bleach line of products, saw the biggest decline at -17%. The household segment, which includes trash bags and other items, fell by 8% well the lifestyle segment fell by 3%. The international segment increased by 5% year-over-year entirely on business related to the joint venture.

Moving down the report, the news only gets worse. The company reports a 970 basis point contraction in gross margin that cut into the company's bottom line. Gross margin decline on the combination of rising input costs, price and mix, and deleveraging of fixed costs relative to revenue. The takeaway here is that production and supply have improved to the point the company has begun to re-offer value packs and that was cited as a major cause of revenue and earnings shortfalls.

Clorox Guides The Market Lower, The Dividend Is Still Safe

The most disappointing news was the guidance. The company is expecting revenue to fall - 2% to -6% versus the consensus estimate of -0.8%. Not only is this a sequential slowing but it is also a deceleration of growth from the pre-COVID period but there is a silver lining. The company is actively working to reinvigorate the IGNITE strategy and says long-term growth and improved profitability are in the cards. The question that needs to be answered is when profitability will be improved because it has a great bearing all on the dividend.

Clorox is yielding over 2.8% with shares trading near $165. The payout ratio is a little high but there is little reason to fear a dividend suspension. At worst, the company may slow down the rate of dividend increases but we do not expect to see it stop increasing the payout on an annual basis. The company has been increasing the dividend for 44 years and is not going to give up that status lightly. 

The Technical Outlook: Clorox May Have Hit Bottom

Shares of Clorox imploded in the wake of the Q4 report but may have hit bottom. Price action is showing support above the $165 level where support has been strong in the past. This price level is consistent with pre-COVID price action as well so you should be a floor for the stock now. Assuming that support continues to hold, we see the stock trending sideways over the next quarter or two until business shows a recovery from the post-COVID let down.