The Clorox Company (CLX, Financial) is a hygiene-oriented stock that has started to slow down with the pandemic tailwinds withering away. The company's most recent quarter was particularly slow with declining demand for cleaning and filtration products, unlike last year when consumers were busy stocking up on home cleaning supplies at the start of the pandemic.
Clorox has also been facing supply constraints in some of its key products, which was also a cause of concern during the quarter. As per the management, the company might also witness a contraction at the gross margin level due to higher commodity prices and rising manufacturing and logistic costs. Overall, it seems like Clorox has a particularly tough year ahead.
Recent financial performance
Clorox reported a tepid performance in its recent quarterly result, which resulted in a further correction in its stock price.
For its third quarter of fiscal 2021, the company reported a top-line of $1.78 billion, which was a 0.11% drop as compared to the corresponding quarter of the previous year. Clorox also underperformed the analyst consensus estimate of $1.86 billion.
Revenue was helped by a good performance in the household segment, which includes bags and wraps, grilling and cat litter. The company's revenues translated into a gross margin of 43.46% and an operating margin of 16.56%, which was lower than that in the same quarter of last year.
Clorox reported a net loss of $61 million and adjusted earnings per share (EPS) of $1.62, which was above the average Wall Street expectation of $1.48.
In terms of cash flows, Clorox reported $264 million in the form of operating cash flows and spent $83 million in investing activities during the previous quarter, resulting in positive free cash flow.
Innovation-led growth
Clorox is focused to bring back some of the innovations it had to pause during the pandemic, including Clorox compostable wipes and Clorox Scentiva disinfecting sprays and wipes.
In addition, last year Clorox was able to introduce Kingsford products to more than one million new households, and they continued to invest in their backyard, including new charcoal and pellet growth, which is expected to create a lasting tailwind for this business. The company has improved its product line-up and distribution, making it easier for consumers to find Kingsford pellet innovation and new flavors of Kingsford product line-up at even more locations nationwide.
Moreover, the company's latest innovation, Glad ForceFlex with Clorox trash bags, has been performing well since its fall 2020 launch.
In the food business, there is continued consumption growth of Hidden Valley Ranch bottle dressings and dry seasonings, and the management is further optimistic about this segment given the success of its recent launch of Hidden Valley Secret Sauces and Hidden Valley plant right-based ranch dressing. This could be a worthy effort in keeping the company's growth strong during 2021.
The IGNITE strategy
In 2019, the company unveiled its integrated IGNITE strategy, which focussed on reinvesting in brands, innovation to create superior consumer experiences and help the company evolve its product portfolio.
As per the management, the pandemic has reinforced the relevance of its IGNITE strategy priorities, which center around people and innovation leveraging technology as a critical enabler. One of the key choices in IGNITE strategy is to generate fuel to support growth and mitigate inflation and Clorox is determined to take a holistic approach to address the increasing cost pressures by leveraging a number of tools to support its margins, including margin accretive innovation, net revenue management, pricing through trade reduction, fewer price increases and an extensive focus on cost savings.
The strategy is proving to be particularly relevant since it leverages significant consumer megatrends that have accelerated because of the pandemic, including prioritizing health and hygiene, drinking more water, consuming vitamins and supplements and spending more time online.
The company's portfolio of products remains uniquely positioned to cater to these changing trends. Moreover, another key part of the strategy involves innovation and Clorox is inclined to reach 100 million people by the year 2025 through continuous investment in new product launches. This strategy has the potential to become a good long-term growth driver for Clorox.
Valuation
As we can see in the chart above, the stock price of Clorox is following a downward trend after its 2020 highs, which can be largely associated with the slowing down of the pandemic tailwinds that drove investor sentiment.
Despite the drop in the share price, the company is trading at a price-earnings ratio of 25.52 and enterprise-value-to-revenue ratio of 3.41, both of which are on the higher side as compared to the industry average for household products, leaving limited room for multiples expansion.
While the new innovations and the IGNITE strategy are interesting long-term drivers, the company has few near-term catalysts that can push its 2021 performance. Overall, I believe that given the rising production costs, supply chain constraints and reduction in demand levels from 2020, Clorox should ideally be avoided at current levels.
Disclosure: No positions.
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