Clorox (CLX) Up 10.6% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Clorox (CLX). Shares have added about 10.6% 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 Tops Q3 Earnings & Sales Estimates, Raises View
 
Clorox reported robust third-quarter fiscal 2020 results, wherein earnings and sales beat the Zacks Consensus Estimate and grew year over year. Strong quarter performance aided management to raise guidance for the fiscal year.

During the quarter, the company experienced strong growth in the disinfecting products and broad-based growth at all four segments as the company catered well to consumers in wake of the coronavirus outbreak. Also, the company’s IGNITE strategy and product portfolio bode well. These factors also position the company well going forward.

Q3 Highlights

Quarterly earnings from continuing operations of $1.89 per share increased about 31% year over year and beat the Zacks Consensus Estimate of $1.72. The upside was mainly driven by higher net sales and gross margin, partly offset by increased selling and administrative costs and advertising investments.

The company posted net sales of $1,783 million, up nearly 15% year over year and above the Zacks Consensus Estimate of $1,714 million. This was backed by 18 points of volume growth on increased demand for products in light of the pandemic. Growth was partly offset by 2 points owing to adverse foreign currency rates and 1 point from unfavorable price mix. Also, organic sales increased 17% in the quarter.

Moreover, Clorox witnessed gross margin expansion of 330 bps to 46.7% in the fiscal second quarter. This marked the company’s sixth straight quarter of gross margin expansion. The rise in gross margin was driven by gains from cost savings and double-digit volumes, somewhat marred by higher trade promotion spending.

Segmental Discussion

Sales of the Cleaning segment surged 32% at $671 million on double-digit shipment increases across all business units. Notably, Home Care was the key driver, with robust gains from Laundry and Professional products on higher demand for disinfecting wipes, sprays, disinfecting bleach, wipes and more. Also, robust consumer demand fueled increased household penetration on its retail brands.

The Household segment’s sales inched up 2% to $500 million mainly driven by Cat Litter and Grilling on higher consumer demand. The improvement was somewhat offset by increased trade promotion spending.

Sales at the Lifestyle segment grew 10% to $339 million on sales growth in three of its four business units and robust contributions from Food and Natural Personal Care. Growth was somewhat offset by a fall in Dietary Supplements on supply disruption owing to the coronavirus pandemic.

At the International segment, sales increased 11% to $273 million from the year-ago quarter on benefits from higher volumes in every geographic region. Though sales were hurt by 11 points of foreign currency impact, this was partly mitigated by strong pricing action implemented prior to the pandemic. Organic sales for the segment rose 22%.

Financials

Clorox ended the fiscal third quarter with cash and cash equivalents of $496 million, and long-term debt of $2,288 million. During the nine months of fiscal 2020, the company generated $806 million of net cash from continuing operations.

Fiscal 2020 Guidance

Clorox updated its outlook for fiscal 2020, assuming minimal supply chain disruptions for rest of the fiscal. It now projects sales growth of 4-6% compared with the prior estimation of low-single digits decline to up 1%. The raised guidance reflects expectations of favorable COVID-19 impact. Also, higher product demand on robust customer plans and innovations will aid. However, the sales view reflects about 2 points of foreign exchange woes. Further, the company now expects organic sales growth of 6-8% versus the prior anticipation of flat to up 2%.

Moreover, gross margin is now estimated to rise substantially, reflecting continued gains from operating leverage backed by robust sales and cost savings. This will be somewhat offset by temporary investments with respect to employees and operational safety measures. Also, increased transportation and warehousing expenses remain deterrents. Advertising and sales promotion spending is now anticipated at nearly 10% of sales. Selling and administrative expenses are projected around 15% of sales. The company envisions effective tax rate of 21-22% for fiscal 2020.

Management now anticipates fiscal 2020 earnings per share of $6.70-$6.90, indicating a rise of 6-9% year over year. Earlier, it had envisioned earnings per share of $6.10-$6.25.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

VGM Scores

Currently, Clorox has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Clorox has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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