What's Keeping Clorox Ticking Even a Month After Earnings?

Consumer products seller, Clorox Inc. CLX is going strong since reporting robust third-quarter fiscal 2017 results last month. This is clearly reflected in the near 5% growth in its share price since May 2. Moreover, the company has grown 17.6% in the last six months, outperforming the Zacks categorized Soap and Cleaning Materials industry's growth of 14.9%.

Clorox Company (The) Price, Consensus and EPS Surprise

 

Clorox Company (The) Price, Consensus and EPS Surprise | Clorox Company (The) Quote

Clorox plans to counter stiff competition with increased brand investments. Further, it is on track with the Go Lean strategy to fight slowing global economies. Moreover, the company aims to keep cost-savings and pricing in place, to battle the expected inflation and increasing commodity pricing. While the third quarter was marked by intense advertising and promotion investments to enhance brand value, it is likely to boost sales and volumes in fourth-quarter fiscal 2017. The company also envisions EBIT margin to improve in the fourth quarter backed by lower selling and administrative costs. That said, management remains confident of delivering another year of top-line and bottom-line growth.

2020 Strategy

The company remains on track with the smooth execution of its 2020 Strategy, which is aimed at boosting growth for the improvement of categories and overall market share. The whole strategy is aimed at achieving certain long-term aspirations, including growing net sales by 3−5%, increasing EBIT margin by 25−50 basis points (bps) and generating free cash flow of 10−12% of sales, all on a yearly basis. Clorox anticipates achieving these targets through key accelerators like investment in brands, development of eCommerce, technological advancements; enhancement of growth culture and focus on the 3Ds – desire, decision and delight.

Diversified Brand Portfolio & Capital Strategy

Clorox's diversified brand portfolio positions the company well above peers to generate above-average industry growth and sustain itself in the currently challenging environment. The company's focus on boosting sales through brands is well-evident from constant innovations and marketing strategies to drive top-line growth. Incidentally, in the first quarter, the company raised its trade promotion spending at a double-digit rate, to sponsor innovations and counter competition in some core categories. These resulted in sales and volume growth of 3.6% and 7%, respectively, in the fiscal third quarter, even amid a challenging consumer environment.

The company has always maintained a disciplined capital allocation strategy, focused on making investments to develop business while using the excess cash to lower debts and enhance shareholder returns through dividend payouts and share buybacks. The company's cash generation ability is also reflected in its tradition of returning excess cash to shareholders in the form of share buybacks and dividend payouts.

What Could Be the Possible Deterrents?

While Clorox delivered strong earnings in the third quarter, the gross margin failed to impress. The gross margin contracted 130 bps to 44% in third-quarter fiscal 2017 owing to increase in manufacturing and logistics expenses, unfavorable mix, higher commodity expenses and increased trade promotion investments.

Though the trade promotional investments are aimed to support product innovation, it is likely to continue weighing upon Clorox's gross margin for some time. Evidently, management expects these investments, along with inflationary pressure and foreign currency headwinds to lead to gross margin deceleration in fiscal 2017.

Bottom Line

We believe that Clorox's growth drivers far outweigh the obstacles and will help the company sustain its impressive momentum. Well, let's wait and see what lies in store for this Zacks Rank #3 (Hold) company.

Stocks to Consider

Until then, investors can count on Unilever Plc UL, which sports a Zacks Rank #1 (Strong Buy). Other stocks worth considering are Church & Dwight Company, Inc. CHD and Reckitt Benckiser Group PLC RBGLY, both carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Unilever, with long-term EPS growth rate of 12%, has surged 38.1% year to date.

Church & Dwight has to its credit a spectacular earnings history as the company delivered an average positive earnings surprise of 6.3% in the past four quarters. Moreover, its long-term EPS growth rate of 9.2% and has jumped 20.5% year to date.

Reckitt Benckiser, with long-term EPS growth rate of 15.5%, has grown 24.5% year to date.

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