Can Clorox's Strategic Growth Efforts Offset Margin Issues?

 | Jan 22, 2019 03:15AM ET

The Clorox Company (NYSE:CLX) is moving up the charts, courtesy of its strategic initiatives including 2020 Strategy, which aims at improving product categories and expanding market share. Its solid focus on e-commerce expansion as well as Go Lean Strategy is also encouraging. However, the company is battling margin pressures due to higher expenses.

Let’s Have a Detailed Analysis

Despite gains from cost savings and increased product prices, margins are under pressure due to elevated commodity, manufacturing and logistics expenses. In first-quarter fiscal 2019, gross margin contracted 150 basis points. The metric is estimated to remain flat in fiscal 2019 as gains from increased prices and cost-savings efforts are expected to be offset by higher costs and adverse foreign currency exchange rates.

Moreover, Clorox remains exposed to major foreign currency risks, which have been affecting its performance. Apparently, net sales were hurt by 2 percentage points from foreign currency in the fiscal first quarter. Although management reiterated its sales forecast for the fiscal year, currency is expected to dent sales by roughly 2 percentage points. Earnings projection for fiscal 2019 was also adversely impacted by currency.

Management anticipates fiscal 2019 earnings per share from continuing operations to be in the range of $6.20-$6.40, down from $6.32-$6.52 projected previously. Earnings guidance was slashed mainly due to the expectations of making fewer share repurchases in fiscal 2019 than nearly 50% of its $2-billion share repurchase authorization guided earlier.

While these factors make us apprehensive, Clorox’s 2020 Strategy along with other growth initiatives appear promising. The company remains keen on the smooth execution of its 2020 Strategy, which is aimed at achieving certain long-term aspirations. These goals include net sales growth of 3-5%, EBIT margin expansion of 25-50 bps and free cash flow generation of 10-12% of sales, all on a yearly basis.

Notably, the 2020 Strategy is likely to be achieved through key accelerators such as investment in brands; development of e-commerce; technological advancements; enhancement of growth culture and focus on the 3Ds - desire, decision and delight.

Clorox's Go Lean strategy across International is expected to help it improve margins through operational efficiencies. The company also remains committed toward investing in product and brand differentiation to safeguard value proposition.

Further, it is focused on strong investments in demand building, including digital marketing, e-commerce and product innovation pipeline. Moving ahead, the company is ahead of track and nearing its 2020 target of $500 million from e-commerce sales.

Clorox’s Performance

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A glance at this Zacks Rank #3 (Hold) company’s price trend reveals that it has outperformed the industry and the broader market in the past six months. Shares of Clorox have gained 18.1% ahead of the industry’s 5.7% growth and S&P 500 index’s 4.9% fall.