Clorox: Cybersecurity Breach Strangled Results, but Shares Still a Bargain

On Oct. 4, Clorox CLX issued preliminary first-quarter results, which are estimated to include an organic sales decline of 21% to 26% and an adjusted EPS loss of $0.40 to flat. This dismal performance reflects the fact that the firm’s operations were shackled by a cybersecurity breach in August that prompted it to take some information technology systems (including ordering) offline, though it resumed automated processes in September and is working to rebuild retailer inventory levels.

Despite the pronounced sales and profit hit to start fiscal 2024, we don’t believe this transitory issue will derail Clorox from restoring gross margin to its historical range of 43%-44% (after being hampered by rampant cost inflation) while investing to support the long-term health of the business. For one, we continue to believe Clorox remains prudently focused on scouring the business for inefficiencies, with a portion of any savings likely to be directed to bolster brand spending. In this context, our forecast calls for Clorox to expend 12% of sales ($1 billion) annually toward research, development, and marketing. And even in the face of these challenges, we don’t surmise efforts to enhance its digital capabilities and streamline its operations—a $500-million investment in the next few years, with the aim of boosting its agility and pushing decision-making closer to the end consumer—have been abandoned. In our view, the combination of these initiatives should foster its relationships with retailers and consumers.

At this juncture, management refrained from altering its full-year 2024 outlook, and we aren’t making any changes to our $168 fair value estimate and long-term forecast (4% organic sales growth and 18% operating margins) given the limited duration of impact from this incident. Shares slipped around 3% after hours, with the stock trading about 25% below our intrinsic valuation while offering a 4% dividend yield. We think investors should stock up on this wide-moat name.