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Clorox (NYSE:CLX) Reports Bullish Q2, Stock Soars


Full Report / February 01, 2024

Consumer products giant Clorox (NYSE:CLX) beat analysts' expectations in Q2 FY2024, with revenue up 16% year on year to $1.99 billion. It made a non-GAAP profit of $2.16 per share, improving from its profit of $0.98 per share in the same quarter last year.

Clorox (CLX) Q2 FY2024 Highlights:

  • Revenue: $1.99 billion vs analyst estimates of $1.80 billion (10.3% beat)
  • EPS (non-GAAP): $2.16 vs analyst estimates of $1.10 (95.8% beat, given some large-one time charges, Consensus modeling of this figure likely not as precise)
  • Full year guidance raised for sales growth and EPS (non-GAAP)
  • Gross Margin (GAAP): 43.5%, up from 36.2% in the same quarter last year
  • Organic Revenue was up 20% year on year
  • Market Capitalization: $18.02 billion

Founded in 1913 with bleach as the sole product offering, Clorox (NYSE:CLX) today is a consumer products giant whose product portfolio spans everything from bleach to skincare to salad dressing to kitty litter.

Clorox bleach is still a powerhouse home care brand used to clean, disinfect, and whiten. However, the company now also boasts Glad garbage bags, Burt’s Bees skincare products, Kingsford charcoal for grilling, and Fresh Step kitty litter to name a few. These brands are both household mainstays as well as innovators that help steer the direction of these categories. For example, Glad was one of the first garbage bags to feature drawstrings, making the bags easier to tie, lift, and carry.

Clorox’s core customer is typically someone who makes purchases for the household. These consumers seek trusted brands that are convenient to find and get the job done. While price matters, Clorox usually doesn’t have to be the cheapest option, as many are willing to pay a reasonable premium to buy established brands rather than lesser-known or private-label brands.

As a consumer goods giant, Clorox products can be found in many retail stores. Grocery stores, mass merchandisers like Walmart (NYSE:WMT), warehouse clubs like Costco (NASDAQ:COST), dollar stores like Dollar General (NYSE:DG), and drug stores like CVS (NYSE:CVS) all carry the company’s offerings.

Household Products

Household products companies engage in the manufacturing, distribution, and sale of goods that maintain and enhance the home environment. This includes cleaning supplies, home improvement tools, kitchenware, small appliances, and home decor items. Companies within this sector must focus on product quality, innovation, and cost efficiency to remain competitive. Household products stocks are generally stable investments, as many of the industry's products are essential for a comfortable and functional living space. Recently, there's been a growing emphasis on eco-friendly and sustainable offerings, reflecting the evolving consumer preferences for environmentally conscious options.

Competitors that offer a wide range of household and personal care products include Proctor & Gamble (NYSE:PG), Unilever (LSE:ULVR), Reckitt Benckiser (LSE:RKT), and Colgate-Palmolive (NYSE:CL).

Sales Growth

Clorox is one of the larger consumer staples companies and benefits from a well-known brand, giving it customer mindshare and influence over purchasing decisions.

As you can see below, the company's revenue was more or less flat over the last three years. 

Clorox Total Revenue

This quarter, Clorox reported robust year-on-year revenue growth of 16%, and its $1.99 billion in revenue exceeded Wall Street's estimates by 10.3%. Looking ahead, Wall Street expects revenue to remain flat over the next 12 months.

Gross Margin & Pricing Power

This quarter, Clorox's gross profit margin was 43.5%, up 7.4 percentage points year on year. That means for every $1 in revenue, $0.56 went towards paying for raw materials, production of goods, and distribution expenses. Clorox Gross Margin (GAAP)

Clorox has good unit economics for a consumer staples company, giving it the opportunity to invest in areas such as marketing and talent to stay competitive. As you can see above, it's averaged a healthy 39% gross margin over the last two years. Its margin has also been trending up over the last 12 months, averaging 15.2% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment where the company has better pricing power and more favorable input costs (such as raw materials).

Operating Margin

Operating margin is a key profitability metric for companies because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.

in line with the same quarter last year. This indicates the company's costs have been relatively stable.

Clorox Operating Margin (GAAP)

Zooming out, Clorox has done a decent job managing its expenses over the last eight quarters. The company has produced an average operating margin of 10%, higher than the broader consumer staples sector. However, Clorox's margin has declined by 2.1 percentage points on average over the last year. Although this isn't the end of the world, investors are likely hoping for better results in the future.

EPS

These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.

In Q2, Clorox reported EPS at $2.16, up from $0.98 in the same quarter a year ago. This print beat Wall Street's estimates by 95.8%.

Clorox EPS (Adjusted)

Between FY2021 and FY2024, Clorox's EPS dropped 35%, translating into 13.4% annualized declines. We tend to steer our readers away from companies with falling EPS, especially in the consumer staples sector, where shrinking earnings could imply changing secular trends or consumer preferences. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).

Wall Street expects Clorox to continue performing poorly over the next 12 months, with analysts projecting an average 2.5% year-on-year decline in EPS.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company's revenue growth was profitable. But was it capital-efficient? If two companies had equal growth, we’d prefer the one with lower reinvestment requirements.

Enter ROIC, a metric showing how much operating profit a company generates relative to its invested capital (debt and equity). ROIC not only gauges the ability to grow profits but also a management team's ability to allocate limited resources.

Although Clorox hasn't been the highest-quality company lately because of its poor top-line performance, it historically did an excellent job investing in profitable growth initiatives. Its five-year average ROIC was 22.7%, impressive for a consumer staples company.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, over the last two years, Clorox's ROIC has averaged a 13.2 percentage point decrease each year. We like Clorox's average ROIC but are concerned it has declined recently, perhaps a symptom of waning opportunities to invest profitably.

Key Takeaways from Clorox's Q2 Results

We were impressed by how significantly Clorox blew past analysts' EPS expectations this quarter, although some large one-time charges that were added back to arrive at the EPS (non-GAAP) figure likely made it difficult for Wall Street to model and project. We were also excited its revenue and gross margin outperformed Wall Street's estimates. Zooming out, we think this was an impressive quarter that should delight shareholders. The stock is up 6.1% after reporting and currently trades at $156.99 per share.

Is Now The Time?

Clorox may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Clorox, we'll be cheering from the sidelines. Its revenue has declined over the last three years, but at least growth is expected to increase in the short term. And while its market-beating ROIC suggests it has been a well-managed company historically, the downside is its declining EPS over the last three years makes it hard to trust. On top of that, its projected EPS for the next year is lacking.

Clorox's price-to-earnings ratio based on the next 12 months is 26.0x. While the price is reasonable and there are some things to like about Clorox, we think there are better opportunities elsewhere in the market right now.

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