The Clorox Company (CLX) in Oakland, Calif., manufactures and markets consumer and professional products worldwide. It operates through four segments: Health and Wellness; Household; Lifestyle; and International.

CLX has benefited from heightened demand for cleaning products during the pandemic, but it is currently grappling with higher costs and supply disruptions that are squeezing its margins. Costs and inflation “are absolutely worse than had been anticipated,” complained Chief Executive Officer Linda Rendle. The company plans to raise prices on 85% of its products by the end of June, with multiple rounds of price hikes in some of its brands planned to shore up its margins.

CLX shares tumbled more than 14% in price on February 4 after the company reported quarterly earnings that fell short of analysts’ expectations and slashed its full-year guidance. The stock is down 17.9% year-to-date. Over the past five days, the stock has retreated 13.4% to close yesterday’s trading session at $143.22. The 12-month median price target of $148.71 indicates a 3.8% potential upside. Several Wall Street analysts have cut their price targets following the quarterly release. The price targets now range from a low of $118 to a high of $185. Here is what could shape CLX’s performance in the near term:

Bearish Sentiments

Among the 14 Wall Street analysts that rated CLX, one rated it Buy, four rated it Hold, and nine rated it Sell.

J.P. Morgan analysts slashed their price target to $137 from $157 and rated the stock Underweight. The stock was downgraded to Underperform from Neutral at Credit Suisse, while Atlantic Equities downgraded the stock to Underweight.

Bleak Financials

CLX’s net sales declined 8.2% year-over-year to $1.69 billion in its fiscal second quarter, ended December 31. The company’s gross profit came in at $558 million, down 33.3% year-over-year, while its gross margin decreased 1240 basis points to 33% from 45% in the year-ago quarter, driven primarily by higher manufacturing & logistics, and commodity costs. Its net earnings attributable to CLX decreased 73.4% from the prior-year quarter to $69 million. And CLX’s adjusted EPS declined 67.5% year-over-year to $0.66, missing the consensus estimate by 21.4%. Its fiscal year-to-date net cash provided by operations declined 64.7% year-over-year to $222 million, while its free cash flow for the same period decreased 76.4% year-over-year to $113 million.

In addition, its EBITDA has declined at a 10.1% CAGR over the past three years. Also, its net income and EPS have decreased at CAGRs of 32.1% and 31.2%, respectively, over the same period, and its levered FCF has declined at a 20.4% CAGR over the period.

Concerning Near-Term Outlook

The company now expects net sales to decrease 1% - 4% for the year. It expects its gross margin to decline about 750 basis points, due primarily to higher than previously anticipated commodity and manufacturing and logistics costs. “It’s going to take several years for us to rebuild margin,” according to Chief Financial Officer Kevin Jacobsen.

The company expects its diluted EPS to be between $3.80 and $4.05, representing a decrease of between 32% and 27%, respectively. CLX lowered its guidance for adjusted earnings per share for the year to a range of $4.25 - $4.50, representing a decrease of between 41% and 38%, respectively. CLX expects sales to return to its long-term sales growth target of 3% - 5% by the fourth quarter.

“Although we expect cost pressures will continue through fiscal year 2022, we’re confident we have the right strategy and are taking the right actions to strengthen our competitive position, build a stronger, more resilient company, and create long-term shareholder value,” Rendle added.

POWR Ratings Reflect Uncertain Prospects

CLX has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a C grade for Momentum. This is justified because the stock is currently trading below its 50-day moving average.

CLX has an F grade for Sentiment. Bearish analyst sentiment about the stock justifies this grade.

Of 66 stocks in the Consumer Goods industry, CLX is ranked #35.

Beyond what I have stated above, one can also view CLX’s grades for Quality, Growth, Value, and Stability here.

View the top-rated stocks in the Consumer Goods industry here.

Bottom Line

CLX has a record of 44 years of consecutive dividend growth history, making it a popular holding among income investors. However, the company is currently struggling with declining margins and FCF. Although CLX is expected to continue with its dividend payments to retain its dividend aristocrat status, it may lead to a high payout ratio, questioning its sustainability. Furthermore, the company expects cost pressures to continue this year. Also, Street expects its revenues to decline 2.4% in the current fiscal and its EPS to decline 38.1%. Thus, we think it could be wise to wait for a better entry point in the stock.

How Does the Clorox Company (CLX) Stack Up Against its Peers?

While CLX has an overall POWR Rating of C, one might want to consider taking a look at its industry peers, Mannatech, Incorporated (MTEX), Société BIC SA (BICEY), and Ennis, Inc. (EBF), which have an A (Strong Buy) rating.

CLX shares rose $0.83 (+0.58%) in premarket trading Wednesday. Year-to-date, CLX has declined -17.32%, versus a -5.06% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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