Clorox Earnings: Pricing and Cost Savings Buoy Gross Margins, but Shares Fairly Valued

The question heading into Clorox’s CLX third-quarter print was whether, following its 320-basis-point second-quarter boon, it would again chalk up gross margin improvement amid inflationary headwinds. Clorox delivered, posting a 590-basis-point bump in gross margin to 41.8%, which was above the sub-36% level it eked out in fiscal 2022, but still shy of typical 43% marks of previous years. The improvement resulted from actions to raise prices (750-basis-point benefit) and unearth cost savings (150-basis-point benefit) that partially offset increased commodity, manufacturing, and logistics costs (350-basis-point hindrance). Moreover, we anticipate Clorox will continue to rebuild profits.

Organic sales jumped 8% in the quarter on a 19% boost from higher prices and favorable mix and an 11% pullback in volumes. And although price hikes haven’t prompted a major revolt by consumers (based on sentiment from Clorox and its peers), we recognize greater volume demise across the consumer products realm could be on the horizon, particularly as lower-priced private-label fare provides formidable competition in the bulk of Clorox’s categories. To blunt such pressure, we’re encouraged Clorox is prioritizing brand investments, with advertising spending up 35%, to 11% of sales. Against this backdrop, we continue to forecast the firm to allocate 12% of sales annually to research, development, and marketing.

With just three months left, Clorox raised its fiscal-year outlook for 3%-4% organic sales growth (from flat to up 3% previously) and $4.35-$4.50 in adjusted EPS ($4.05-$4.30). We’ll move our near-term projections within the revised ranges, but aren’t wavering on our long-term forecast of 3%-4% annual sales growth and operating margin returning to the high teens. As such, our $166 fair value estimate shouldn’t change much. Although, with shares up about 20% year to date, the stock doesn’t offer an attractive risk/reward, we think investors should keep an eye on this wide-moat stock.