Clorox Kick Starts Fiscal 2013 - Analyst Blog

By Zacks | November 01, 2012 AAA

California-based Clorox Corporation (CLX) started fiscal 2013 on a triumphant note as it came up with impressive earnings and sales comparisons for the first quarter of fiscal 2013. The company posted earnings per share of $1.04 compared with $1.01 earned in the prior-year quarter, up 3.0% year over year. Quarterly earnings also outdid the Zacks Consensus Estimate of 95 cents, reflecting a surprise of 9.5%.

Including foreign exchange impact, the company reported earnings per share of $1.01 versus 98 cents reported in the year-ago quarter.

The company's earnings benefited from improved revenue as well as gross margins, offset by higher selling and administration expenses as the company continues to invest in information technology (IT) systems.

Net sales elevated 2.5% year over year to $1,338 million from $1,305 million in the year-ago quarter, mainly on account of improved prices, offset in part by lower volumes and unfavorable foreign exchange. However, total revenue fell short of the Zacks Consensus Estimate of $1,352 million.

Total volumes waned 1% compared to last year as higher prices during the quarter pulled down total shipments.

Revenue by Segment

Sales in the Cleaning segment grew 8% to $472 million primarily due to a 4% volume growth and higher prices. During the quarter, the segment witnessed volume growth in its Professional Products business and flat volume compares in the Home Care unit, offset by lower shipments in the Laundry business. However, overall segment sales growth was ahead of volumes growth, driven by higher prices for products.

Household segment sales skidded 3% to $355 million, while volume dipped 7%. Sales and volumes in the quarter were affected by fall in Charcoal business due to price increases made earlier in the calendar year as well as strong merchandising and volume comparisons from the year-ago quarter.

Sales at the Lifestyle segment rose 1% to $208 million, despite a 1% decline in volume, largely benefiting from price increases. Volume growth in the Food business was offset by decline in Water Filtration business and Burt's Bees volumes.

In the International business segment, Clorox's sales rose 3% to $303 million, benefiting from price increases, partially offset by a 2% volume decline and unfavorable foreign exchange. Volume decline was attributed to the exit of nonstrategic export businesses. On the other hand, the segment's Base business in Latin America reflected growth, while sales and volumes in Canada were marginally down.

Costs and Margins

Clorox's adjusted gross margin expanded 90 basis points (bps) to 42.9% from 42.0% in the year-ago quarter. Solid costs savings and improved prices led to increase in margins, while inflation played spoilsport impacting manufacturing and logistics costs, as well as other supply chain costs.

Advertising costs elevated 3.4% year over year to $122 million, while as a percentage of revenue it increased 10 basis points to 9.1%. The effective tax rate increased from the year-ago quarter to 31.6%, while it missed the forecast.

Balance Sheet and Cash Flow

Clorox ended the quarter with cash and cash equivalents of $667 million and long-term debt of $2,169 million. During the year, the company generated $208 million net cash from operations, exhibiting an increase of $77 million from the year-ago period.

In September, Clorox issued senior notes worth $600 million with a maturity period of 10 years. This issue will help the company boost its cash balances to repay long-term debt of $350 million that matured in mid-October.

Guidance Reiterated

Looking ahead, Clorox reiterated its sales growth forecast of 2%-4% for fiscal 2013, driven by better categories growth, market share gains and further product innovation across its brands. The company expects operating income margin to expand by 25 to 50 basis points in fiscal 2013, on the back of strong cost savings, the benefit of price increases and improved forecasts for commodity costs.

Effective tax rate for fiscal 2013 is expected in the range of 33% - 34%. The company anticipates annual earnings of $4.20 to $4.35 per share in fiscal 2013. The Zacks Consensus Estimate for fiscal 2013 stands at $4.29 per share, which lies within the company's guidance range.

Further, Clorox guided expenditures toward systems and facilities development and other restructuring initiatives to be in the range of $50-$55 million in fiscal 2013. Free cash flow for fiscal 2013 is estimated to be about 9% - 10% of sales.

Our Take

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 international markets. 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 Outperform recommendation on the stock.

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