Why Is Clorox (CLX) Up 5.9% Since Last Earnings Report?

It has been about a month since the last earnings report for Clorox (CLX). Shares have added about 5.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Clorox due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Clorox Misses on Q4 Earnings & Sales, Gives Bleak View

Clorox reported dismal fourth-quarter fiscal 2022 results, wherein the top and bottom lines missed the Zacks Consensus Estimate. Moreover, the bottom line declined year over year, while sales remained flat with the last year. Gains from solid demand for its products and brands, cost-saving efforts, and pricing actions were partly offset by a higher tax rate and lower shipments. The company issued a bleak view for fiscal 2023.

Adjusted earnings of 93 cents per share decreased 2% year over year and missed the Zacks Consensus Estimate of 95 cents. The earnings decline can be attributed to a higher effective tax rate, partly negated by reduced advertising costs.

Net sales of $1,801 million were flat with the year-ago quarter and lagged the Zacks Consensus Estimate of $1,856 million. On an organic basis, sales improved 1%. Sales gains from strong pricing in the quarter were almost fully offset by lower shipments. However, the company reported sales growth in three of the four reportable segments.

The gross margin remained flat year over year at 37.1% in the fiscal fourth quarter. Elevated manufacturing and logistics costs, and higher commodity costs mostly offset the gains from pricing and cost savings initiatives.

Segmental Discussion

Sales of the Health and Wellness segment declined 5% to $635 million, owing to soft sales across all three business units. The downside was led by an 18-point decline in volume, offset by a 13-point gain from a favorable price mix.

The Household segment’s sales improved 4% to $580 million, driven by sales growth in two of the three business units. Sales growth for the segment can be attributed to 8 points of pricing gains, offset by 4 points of lower volume.

Sales in the Lifestyle segment rose 1% year over year to $292 million, owing to growth in two out of three businesses. The segment benefited from a 4-point gain from a favorable price mix, offset by a 3-point decline in volume.

In the International segment, sales of $294 million were up 4% year over year, as a 13-point gain from favorable price mix was partly offset by 1 point of lower volume and an 8-point impact from unfavorable currency. Organic sales for the segment improved 12%.

Financials

Clorox ended fiscal 2022 with cash and cash equivalents of $183 million, and long-term debt of $2,474 million. In fiscal 2022, the company generated $786 million of net cash from operations.

Fiscal 2022 Guidance

Management issued the fiscal 2023 view. The company envisions net sales to be between down 4% and up 2% year over year in fiscal 2023. Organic sales are anticipated to be between down 3% and up 3%.

The gross margin is expected to increase 200 bps in fiscal 2023, driven by the combined benefits of pricing actions, cost savings and supply-chain optimization efforts, offset by continued cost inflation.

The company estimates selling and administrative expenses to be 15-16% of sales, including 1.5 points of impact from its strategic investments in digital capabilities and productivity enhancements. The company anticipates advertising and sales promotion spending to be 10% of sales, driven by the company’s commitment to investing in its brand portfolio. The effective tax rate is anticipated at 24%.

The company expects adjusted earnings of $3.85-$4.22 per share for fiscal 2023. The guidance suggests a year-over-year decline of 6% to an increase of 3%. The company expects the normalization of demand for products that witnessed peaked trends in the past two years and continued progress to rebuild gross margin in fiscal 2023. The company’s earnings view excludes long-term investments in digital capabilities and productivity enhancements to provide greater visibility of the underlying operating performance. On a GAAP basis, earnings per share are anticipated to be $3.10-$3.47, suggesting a decline of 7-17% from the year-ago period.

Business Developments

Concurrent with the earnings release, management announced a streamlined operating model to create a faster, simpler company through the Reimagine Work under its IGNITE strategy. The operating model, which is expected to be implemented in the first quarter of fiscal 2023, will help increase efficiency, move decision-making closer to consumers, and enable it to better meet consumer needs.

The operating model is expected to generate ongoing annual savings of $75-$100 million, with benefits likely to occur starting in fiscal 2023. The company anticipates selling and administrative expenses to be 13% of sales over time due to these changes and its ongoing productivity efforts. It is also likely to record a charge of $75-$100 million related to the new operating model over fiscal 2023 and 2024. Of this, the company expected $35 million, or 20 cents, to be recognized in fiscal 2023 under other income and expenses.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

The consensus estimate has shifted -42.79% due to these changes.

VGM Scores

Currently, Clorox has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Clorox has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.

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