I have been skeptical on The Clorox Company (NYSE:CLX) in the past, yet as shares appear (again) on the list of 52-week lows, it is time to update the investment case on Clorox. My last take on the business dates back to March 2022, when I concluded that Clorox was far from clean, with pandemic induced earnings falling below their normal levels amidst a normalization in demand but also emerging inflationary pressures.
With the business operating largely stagnant ever since, and high payout ratios prohibiting deleveraging efforts, it is hard to get upbeat on Clorox, certainly as a massive IT incident will make 2024 another challenging year. Therefore, real execution is needed to create appeal for the shares, even at these historically lower levels.
Establishing A Base
Clorox hardly needs an introduction, as the nature of its (cleaning) products made it a poster child for the market behavior during the pandemic. Shares rallied 50% from $160 to $240 in just a few months time during the pandemic, only to fall to the $137 mark in spring of 2022, thereby trading below pre-pandemic levels.
The composition of cleaning, household and lifestyle products as well as an international business created quite a stable consumer defense business. Pre-pandemic, that is during the year 2019, the company generated $6.2 billion in sales, on which it posted earnings of $820 million, with earnings reported at $6.32 per share.
With the pandemic only impacting the last two quarters of the fiscal year 2020, in which demand for wipes, trash bags and other products was up, 2020 sales only rose by 8% to $6.7 billion. Earnings were up 15% to $939 million, equal to $7.36 per share.
This demand surge was also seen in (the beginning of) 2021 with sales up 27% in the first two quarters of the year, yet higher commodity and shipping costs hurt the results later during the year. While revenues grew further to $7.3 billion, earnings actually fell slightly to $7.25 per share.
The 2022 guidance was quite shocking, with sales seen down 2-6% and earnings seen down to $5.55 per share following 3-4 percentage points of anticipated margin compression with earnings seen below pre-pandemic levels, as inflationary impacts meant that earnings were only seen between $4.25-$4.50 per share following the release of the second quarter results.
With earnings down 40% from the peak I was not necessarily appealed to the shares in the $130s, and while inflationary pressures at some point could subside and normalize, I feared more private label competition as well as ESG headwinds to its portfolio in the long haul. While Clorox is a true dividend aristocrat, I failed to have conviction to initiate a position.
Standstill
Since this cautious tone about one and a half years ago, shares of Clorox have largely traded in a $125-$175 range, now trading towards the lower end of the range at $132 per share.
Forwarding to August 2022 we saw Clorox report a fall in annual sales from $7.34 billion to $7.11 billion, with GAAP earnings falling from $5.58 per share to $3.73 per share. Adjusted earnings fell even more pronounced, down 43% to $4.10 per share, coming in below the already dismal outlook. Net debt of $2.5 billion was pretty stable, as the 2023 guidance was nothing to get upbeat on.
Clorox guided for sales to come in between minus 4% and up 2%, with adjusted earnings seen between $3.85 and $4.22 per share, suggesting another year of such sluggish performance. Needless to say, with dividends trending at $1.18 per share, net debt was set to increase further.
With the outlook being non-impressive, Clorox raised the outlook in a modest fashion following the second quarter results for 2023, and again in the third quarter. This gave the company and its board sufficient comfort to hike the quarterly dividend by two pennies to $1.20 per share (on a quarterly basis) in July of this year.
In August, Clorox reported a 4% increase in 2023 sales to $7.4 billion, with fourth quarter sales up double digits. GAAP earnings for the year came in at a dismal $1.20 per share, although that adjusted earnings rose substantially to $5.09 per share, with the discrepancy mostly due to impairment charges and restructuring and improvement initiatives. Net debt actually fell to $2.2 billion as momentum into 2024 is clearly there, with adjusted EBITDA trending at a billion.
Momentum is evident in a 12% increase in fourth quarter sales (although volumes were down some 2%, which tells you a lot about the composition of growth). This triggered a huge increase in adjusted earnings, which rose 80% to $1.67 per share.
That current momentum is only set to continue in a modest fashion in 2024 with reported sales seen between flat and up 2%, with adjusted earnings seen between $5.60 and $5.90 per share.
And Now?
The truth is that I am not too convinced. After the 2022 performance was soft, the 2023 guidance was not too inspiring although that the company easily delivered on the results amidst inflationary pressures which helped the (sales) results. Nonetheless, even with the impact of cumulative inflation we are trending below 2019 here, which is not too comforting.
While the fiscal 2024 is not setting up to be something impressive, the company furthermore announced that it suffered a major IT breach over the last week. Taking systems offline and resorting to manual processes, this resulted in product availability issues (among others). While its operations have gone back online, a material impact to the first quarter results is expected.
Amidst all of this, I find myself not considering an allocation about one and a half years down the line, amidst a flattish share price. The past two years have been a period of consolidation with all earnings earmarked to dividends, as real growth is needed to reduce payout ratios and normalized margins. By now it is clear that the 2024 outlook (certainly after the IT-breach) is not going to deliver on this, making me still a patient watcher of The Clorox Company from the sidelines.
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