Summary
- CLX reported its fiscal Q2 earnings which beat expectations while management revised guidance higher.
- The company has stabilized its sales trends while cost savings initiatives have been positive for margins.
- Shares are pricey in terms of valuation, although the stronger outlook supports the premium alongside a quality 3% dividend yield.
The Clorox Company ( CLX ) recently reported earnings, with a solid top and bottom line beat to estimates. The stock has rallied from 2022 lows and is currently trading near a 10-month high. In many ways, this quarter marked a turning point for the company which is attempting to emerge from significant disruptions in recent years.
As a recap, there was a period back in 2020 when Clorox products such as disinfecting wipes and cleaning solutions were must-have items for both consumers and businesses focusing on themes like Covid safety. Following that initial sales boom, the combination of supply chain disruptions and weaker demand as the pandemic ended forced the company to make changes. Fast forward, the effort now to get back to basics by focusing on brand strengths and rebuilding margins appears to be a making process.
We like CLX for its leadership position in important segments of consumer staples, beyond just household cleaning. The ongoing financial turnaround is set to accelerate earnings going forward which we believe can work as a catalyst for the next leg higher in the stock price.
CLX Earnings Recap
Clorox's fiscal 2023 Q2 non-GAAP EPS at $0.98 came in at $0.32 ahead of the market consensus, and up 48% year-over-year. With revenue of $1.7 billion, a 1.4% y/y increase, and organic sales a bit stronger at 4% with some FX volatility. For context, the period last year was marked by a -8% decline in net sales, meaning the results here go a long way to show some stabilization of the business, even amid ongoing macro headwinds.
The story this quarter was the 320 basis point improvement to the gross margin that reached 36.2%. This was driven by pricing efforts and cost saving initiatives. Management has made an effort to optimize inventory levels and streamline overall operations. Advertising expenses down -7% y/y added to the profitability.
Operationally, the "Health and Wellness" segment, which includes cleaning and professional supplies, saw a -2% net sales decline. This considers a 17% average pricing increase helping to balance a -19% drop in volume, again largely on the side of Covid-type products.
More favorable was the 9% increase in sales to the "Household" segment that captures items like kitchen wraps, grilling tools, and cat litter items. This group saw both pricing and volume gains in the single digits. The 2% sales increase in the "Lifestyle" segment was supported by what management believes to have been a good market response to product innovation.
source: company IR
In terms of guidance, it was good to see Clorox revise higher full-year earnings targets compared to prior estimates. Net revenue is still expected to be around flat compared to 2022, but the understanding is that the second half of the year is trending stronger. The gross margin estimate was reaffirmed at trending +200bps.
CLX FY 2023 Guidance | NEW | old |
net sales | -2% to a +1% | -4% to a +2% |
organic sales | flat to a +3% | -3% to +3% |
diluted EPS | $3.20-$3.45, -14% to -8% y/y | $3.10-$3.47, -17% to-7% y/y |
adjusted EPS | $4.05-$4.30, -1% to +5% y/y | $3.85-$4.22, -6% to+3% y/y |
Finally, we can mention the company ended the quarter with $168 million in cash and equivalents against $3.0 billion in total debt. While the leverage ratio has climbed over the past year, we view the position as stable considering EBITDA over the trailing twelve months is around $1 billion and expected to climb going forward .
The company recently declared its latest quarterly dividend of $1.18 per share. While nothing has been announced, we expect a modest $0.01 or $0.02 increase announcement for the next quarter in line with an ongoing 20-year history of increasing the annual payout. The forward yield on the stock is around 3.1%
What's Next for CLX
In our view, the latest results go a long way to brush aside fears that Clorox had lost its place and the company was facing some sort of deeper financial deterioration. Solvency and liquidity appear fine, and we can reaffirm some confidence that the dividend is sustainable. With a sense that conditions have at least stabilized compared to the weaker 2022, the next step will be to restore the long-term growth trajectory.
On this point, the strength of Clorox comes down to its brand portfolio which is much more than just the namesake "bleach". Management notes that over 80% of the portfolio stands as either the number one or two in terms of market share, with 90% of U.S. homes trusting the products. Going forward, the opportunity will be to grow that market share, while finding opportunities internationally to expand.
The long-term target remains to drive 3% to 5% annual sales growth while capturing 11% to 13% as a free cash flow conversion. Initiatives like modernizing its digital presence and the broader cost saving steps are expected to work in that direction.
According to consensus estimates, the revenue and EPS forecast for fiscal 2023 are within management guidance. What's more interesting is looking ahead into 2024 where EPS is expected to leap by 27% toward $5.35, and also maintain momentum above 16% in fiscal 2025. Again, this would be driven by the strong margins tailwind and an improving macro backdrop.
Focusing on that fiscal 2024 EPS estimate, we believe shares trading at a 1-year forward PE at 28.5x represent a "premium" valuation but are otherwise consistent with the company's historical trends. The key here is to place CLX in the context of other consumer staple names that share the connection to a premium, market-leading brand.
We can draw a parallel to stocks like WD-40 Co. ( WDFC ), or McCormick & Co. ( MKC ) where the core product, much like Clorox bleach, is differentiated by strong brand loyalty. The sense is that this dynamic justify a market premium compared to more commoditized alternatives. By this measure, shares are "reasonably" priced net to this peer group.
At the same time, CLX benefits from a higher dividend yield, and the earnings growth and firming margins outlook for next year gets particularly impressive. The point here is to say that CLX shares are hardly "cheap" but that quality keeps shares bid based on the intangibles and flexibility of strategic directions.
CLX Stock Price Forecast
We are bullish on CLX with the caveat being that the upside should be relatively limited. Our year-ahead price target is $170, implying a 13% upside from the current level. The way it could get there would be based on the continued financial momentum in the operating turnaround with shares benefiting from the improved sentiment. Improving global macro conditions with easing supply chain disruptions and declining inflationary pressures should be a boost on the demand side.
Looking out toward fiscal 2024, a scenario where the EPS estimates get revised a bit higher towards $5.75 would imply a one-year forward P/E for the stock at 30x at our price target. Shareholders would also capture the dividend yield as part of the total return.
In terms of risks, management execution of the restructuring strategy is key. Weaker-than-expected sales trends over the next few quarters would open the door for a repricing lower. The margin levels and cash flow trends will be key monitoring points.
For further details see:
Clorox: Finally Emerging From The Pandemic Shadows