Why Church & Dwight Comes Out Ahead in Any Economy
Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In Church & Dwight’s (NYSE: CHD) most recent conference call, Chairman and CEO Jim Craigie outlined seven reasons why the company is better positioned than its competitors are in tough economic times. I gave a brief overview of them in this article, but let’s take a closer look at each of them, and see how they enable the company to cope with lower consumer spending.
Unique Product Portfolio
Church & Dwight offer a good mix of premium and value brands in the shopping aisles. In recent years, its value brands have kept the bottom line growing at double-digit rates. Value brands now account for 40% of the company’s revenue, as the United States continues to recover from the recent recession.
Church & Dwight’s value line include market-leading brands, such as Arm & Hammer and Trojan. In the most recent quarter, Arm & Hammer overtook All as the number three liquid laundry detergent brand. Trojan maintained its number one position, and actually grew market share by 1 percentage point.
Having a wide portfolio of value brands allows the company to continue moving product, despite lower consumer spending. In addition, the company is able to capitalize on higher consumer spending, once the economy recovers, with its robust line of premium brands. No matter the economic conditions, Church & Dwight is able to sell its products.
Eight ‘Power Brands’
The Church & Dwight portfolio consists of over 80 different brands. However, just eight of those brands account for 80% of the company’s revenue and profits. These are what Church & Dwight refers to as its ‘power brands’ – Arm & Hammer, Trojan, OxiClean, SpinBrush, First Response, Nair, Orajel, and Xtra.
The company aggressively markets each of these brands in an effort to capture more market share from competitors. In the first three quarters of this year, the company saw increases in market share for five of the eight brands in every quarter.
Having strong brand name recognition is important, but this is nothing the company’s strongest competitors don’t have. Procter & Gamble (NYSE: PG) has Tide, Gillette, Head & Shoulders, Bounty, Charmin, Crest, etc. Colgate-Palmolive (NYSE: CL) has Colgate, Palmolive, Softsoap, Ajax, Speed Stick, etc. Nonetheless, the ability to generate strong revenues from fewer than 10% of the company’s brands will allow Church & Dwight to focus advertising dollars when necessary.
Historically, Church & Dwight is an adamant defender of its brands’ market shares. This is particularly true of its ‘power brands.’ This is most recently evidenced when Sun Products introduced an OxiClean laundry additive copy-cat a few years ago. Since Sun entered the market, Church & Dwight has fought to maintain market share. In the most recent quarter, Oxiclean captured 41.1% of the market for laundry additives, twice as much as Sun, and a higher percentage than when Sun first entered the market.
The ability of the company to maintain market share in the face of major competitors and new products is important to keeping earnings stable. The marketing abilities of Church & Dwight are quite extraordinary, and the aggressive spending the company puts into marketing is more than justified by the results.
In this most recent quarter, Church & Dwight saw its international organic sales grow by 6.7% year-over-year. While the company only derives 20% of its revenue from abroad, it’s the company's fastest growing market. Additionally, its biggest competitor, PG, does the majority of its business internationally. In order to compete, the company must maintain good growth abroad.
Church & Dwight’s international business has delivered high single-digit sales growth and double-digit operating profit growth over the past five years. The company hopes to continue this trend after good first and third quarter international growth in 2012, driven by its Nair brand and the introduction of Batiste in the U.K. and Australia.
Gross Margins & Overhead
Jim Craigie is focused on cutting costs and increasing margins. It’s part of his ‘Fix the Six’ initiative he outlined earlier this year. Overall, his efforts have proved successful. Gross margin is up 100 basis points in the most recent quarter compared to a year ago, and operating margin is up 200 basis points. This is an important factor for Church & Dwight to continue improving upon, because the competition is improving nearly as much.
Colgate-Palmolive still leads the group with outstanding margins, but Craigie’s focus and determination to improve the company’s numbers makes me confident Church & Dwight can catch up. The results are already apparent in the company’s SG&A costs.
In its third quarter, Church & Dwight cut SG&A costs $1.9 billion, or 70 basis points as a percentage of revenue. This was mostly due to lower legal fees and a shift in timing for R&D. Overall, however, the company expects 2012 SG&A costs to move lower by 20 basis points as a percentage of revenue. The effects of cost-cutting and margin increasing measures is seen quite evidently in the fact that Church & Dwight leads the industry in revenue per employee.
Free Cash Flow Conversion
Church & Dwight generated $315.9 million of net cash in the first nine months of 2012. That figure is $3.3 million less than the same period a year ago, but also accounts for nearly $9 million in additional capital expenditures. The company has spent approximately $50 million on capital expenditures year-to-date, $24 million of which went toward building a new manufacturing and distributing facility in California.
Church & Dwight has a historically strong balance sheet, with free cash flow quadrupling over the past 10 years. Cash conversion has been over 100% for the past five years. The company expects to meet that mark again this year.
High amounts of cash on hand allow the company to make new acquisitions to add to its portfolio, as it did recently with Avid Health. The company can also use cash to invest in its supply chain and expand its production capabilities.
Overall, these factors make Church & Dwight fairly well suited to compete in any economic environment. Competition in the consumer packaged goods industry is fierce. It’s most important to have good brand recognition across various price-levels. Additionally, Church & Dwight is efficient at cutting the fat – lowering overhead, increasing margins – and turning revenues into cash. Its balance sheet is fantastic, and having a large amount of cash can get a company through any economy.
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