Despite macroeconomic headwinds and inflationary input cost situation, Clorox Corporation (CLX) posted better-than-expected second-quarter 2012 results. During the quarter, earnings per share climbed over 16% to 79 cents compared with the prior-period earnings of 68 cents, beating the Zacks Consensus Estimate of 69 cents per share.
The company’s year-over-year earnings growth was primarily driven by benefits from cost-saving initiatives and price increases. However, higher raw material, manufacturing and logistics costs were a minor deterrent.
Clorox’s net sales during the quarter gained 4% year over year to $1,221 million from $1,179 million in the year-ago quarter, driven by product innovation and increased pricing, partially offset by adverse product and country mix. Total revenue beats the Zacks Consensus Estimate of $1,202 million. Total volume in the quarter remained flat as volume gains from Household and Lifestyle segments were offset by lower International shipment and flat volume in Cleaning segment.
Revenue by Segment
Sales in the Cleaning segment grew 5% primarily due to increased pricing. Volume remained flat year over year as volume gains in health care unit were offset by lower shipment in Laundry and Home Care business unit.
Household segment sales increased 4% primarily due to 1% growth in volume and increased pricing. Higher volumes resulted from growth in Cat Litter shipments, which were partially offset by lower volumes in Bags & Wraps.
Clorox’s Lifestyle segment recorded a 6% sales jump in the quarter compared with the base period a year ago, on the back of volume growth of 2% and increased pricing. The volume growth was primarily driven by higher shipments in Water Filtration and Natural Personal Care business unit, partially offset by lower volumes at the company’s Dressing and Sauces business unit.
In the International business segment, Clorox’s sales were flat, as the benefit from price increases was fully offset by decreased volume, unfavorable foreign exchange rates and country mix. During the quarter, the company registered a 1% decline in volumes due to lower volume in Latin America region.
Clorox’s gross margin decreased 20 basis points (bps) to 41.5% from 41.7% in the year-ago quarter. Increased commodity, manufacturing and logistics costs, unfavorable product and country mix more than offset benefits from price increases and prudent cost savings, leading to the gross margin contraction.
Balance Sheet and Cash Flow
At quarter end, Clorox had cash and cash equivalents of $297 million and long-term debt of $2,070 million. During the quarter, Clorox bought back 2.3 million shares of the company’s common stock for $149 million by using the sale proceed from the company’s Auto care business unit. Since February 2011, the company has used all the proceeds from the sale of Auto care business unit to repurchase 10 million shares for $679 million.
Guidance
Looking ahead, the company has raised its annual sales growth guidance range for fiscal 2012 to 2% – 4% from the 1% – 3% forecasted earlier. Clorox continues to anticipate annual earnings of $4.00 to $4.10 per share. The current Zacks Consensus Estimate stands at $4.07 per share, which is more inclined towards the higher end of the company’s guidance range.
Gross margin is expected to drop in the range of 50 – 75 basis points in anticipation of higher raw materials costs. Moreover, the company is expected to generate a free cash flow of about 10% of sales in fiscal 2012 and make a capital expenditure of $36 – $40 million in global information technology system.
Our Take
In an effort to enhance its market share and product portfolio, Clorox is constantly looking for acquisitions and alliances opportunities. With the acquisition of Caltech Industries (provider of disinfectants to the healthcare industry), Clorox has expanded its capabilities in the areas of health and wellness. With this acquisition, Clorox has become a provider of bleach disinfectants to more than 2,500 acute care facilities across the United States. We believe that the acquisition has not only strengthened the company’s product offerings, but also its expertise, R&D and sales capabilities.
Moreover, Clorox is making intensive capital investments in information technology systems and capabilities, particularly in the international market and R&D facilities to boost productivity while providing platforms for growth, product innovation and cost savings. The company believes that these initiatives will begin delivering benefits later in fiscal 2014 and beyond.
Clorox faces intense competition from other well-established consumer product companies both in the U.S. and in international markets. Most of the company’s products compete with other widely advertised brands within each product category and private label brands and generic non-branded products of grocery chains and wholesale cooperatives in certain categories, which typically are sold at lower prices. The main competitors of Clorox are Colgate-Palmolive Company (CL) and Procter and Gamble Company (PG).
Currently, Clorox has a Zacks #3 Rank, implying a short-term ‘Hold’ rating. We have a long-term ‘Neutral’ recommendation on the stock.
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