Don’t Read Too Much Into Clorox Guidance
Shares of The Clorox Company (NYSE:CLX) are falling after the company released calendar Q4 earnings and what some are calling weak guidance. To be clear, shares aren’t falling because the guidance is weak, it isn’t, shares are falling because the company warned comps in the back half of the year would be tough. The back half of Clorox fiscal year coincides with the first two-quarters of the pandemic, a time when revenue and sales jumped by 15% and 20% respectively. No doubt the comps are going to be hard, that’s not really a surprise which means today's sell-off is more knee-jerk reaction than anything else.
What investors need to focus on are these points. First, the company is guiding the fiscal year to be up 10% to 13% versus the previously expected up 5% to 9%. The second is that comps in the back half are expected to be flat which means gains posted last year are sticky. The third is that a widespread reopening of the economy, even with vaccines, could very well keep demand at record high levels. We’re still going to need a lot of wipes and sanitizers and that means the forecast could be modest.
Clorox Is Leveraging Its Growth
Clorox reported a very strong quarter indeed. The company reported $1.84 billion in net consolidated revenue or an increase of 27% from last year. The company’s net is down about 4.0% on a sequential basis but that is seasonally expected. The YOY growth remained steady at the accelerated pace of 27% and beat the consensus by 515 basis points. On an organic basis, the company grew 26% versus the 20.5% that was expected by the analysts.
On a segment basis, the company saw strong gains in the Health&Wellness and Household categories with both posting double-digit increases in revenue showing earnings leverage. Earnings in these categories outpaced revenue growth with gains of 84% and 36% respectively. The Lifestyle segment saw its revenue grow by 9% but suffered a slight decline in earnings. Poorly performing sub-segments, higher costs, and increased ad-spend are to blame. The final segment, International, grew sales by 23% and produced a 3% increase in earnings.
Moving on down to the margins and earnings, the company was able to widen its gross margin by 130 basis points making the 9th consecutive increase. The gains are due to volume leverage and cost-saving initiatives that are both expected to hold steady into the next year. As for earnings, the company posted $2.03 in GAAP earnings for a gain of 39%. Looking forward, the gross margin is expected to contract slightly in 2021 due to rising commodity prices and shipping costs but not enough to adversely impact the growth outlook. With $5.25 in EPS already in the bag, Clorox’s guidance seems a bit cautious.
Clorox Is A Great Dividend Payer
Clorox yields a very healthy 2.2% with shares trading near $200 and there is a positive outlook for growth. Not only has the company been increasing the payout for over 40 years but there is room on the books to do it. The company is producing record levels of free cash flow and has a growing pile of cash to prove it. Along with that, the company is only lightly levered with ample coverage so there really is no reason not to expect that 44th increase in the 4th quarter of the fiscal year.
The Technical Outlook: Clorox Falls To Support, And Buyers Step In
Shares of Clorox fell more than -4.0% to hit a major support level that has been gaining strength since the summer of 2020. Today’s price action marks the 6th time support has confirmed at this level and the bounce looks fairly strong. The caveat is that this candle is not yet completed, the market is still open, so take this forecast with a grain of salt. In the bull case, support is confirming so at least sideways action should be expected from this point. With the outlook for growth improving and a chance for guidance to be raised again we favor this outlook. In the bear case, if price action fails to hold above $193 there could be a much deeper correction.
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