Clorox Earnings - Behind the Headlines
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Clorox (NYSE: CLX) is more than just bleach. A conglomerate with surprising brand diversity, it owns names such as Formula 409, Liquid-Plumr, Glad, Kingsford, and Brita, just to name a few. Clorox competes with other large multinational companies like Procter & Gamble (NYSE: PG) and Colgate-Palmolive (NYSE: CL). Since many of these company's brands are consumer staples, they have been popular with investors looking for safety. Let's look at what is going on with Clorox as of their most recent earnings report, and see what we can find behind the headline numbers.
Clorox grew revenue by 7.4% year-over-year, but EPS was basically flat. The company operates in four different major segments: Cleaning, Household, Lifestyle, and International.
The Cleaning segment is comprised of Clorox, Formula 409, Pine-Sol and others. On a year-over-year basis this segment grew revenues by 10%, however volume growth was 7%. This was actually a theme with each division. Volume growth was outpaced by earnings growth because the company raised prices. Cleaning is one of the two largest divisions, so their volume growth is fairly impressive. Just for a point of comparison, Procter & Gamble's Fabric and Home Care division showed just 2% growth.
The Household segment, which includes brands like Glad, Kingsford, and Fresh Step, grew revenues by 6%, however the disconnect from volumes was more pronounced as volume only increased 2%. Colgate-Palmolive's Pet division is this segment's closest competitor. Last quarter this division showed organic growth of 2%, which is in line with what Clorox achieved.
Clorox's Lifestyle division includes their Hidden Valley, Brita, and Burt's Bees brands. This division showed a 10% increase in revenues on a 4% increase in volumes. With an over 30% operating margin, compared to just over 20% margins in the other divisions, Clorox would be well advised to put more advertising dollars here. In theory, greater sales growth would drive the highest income growth.
Last, the International division of the company showed 4% revenue growth on volume growth of just 1%. This is somewhat troubling because using Colgate-Palmolive as a proxy, they saw strong organic growth in Latin America, Asia, and Africa, with a small decline in Europe. Colgate managed to turn this into 5.5% overall organic growth internationally. Clorox should be looking internationally for sales and volume growth in the future, and these results just aren't going to cut it.
What else should investors be aware of? First, I would look at the fact that Clorox's gross margin dipped from 44% last year to just over 42% this year. The company cited an “unfavorable mix” of products sold several times. Usually this means customers are choosing the lower end of the product line to save money, a trend that most conglomerates are facing today. Consumers forced to cut spending are trying store brands to save money. Once a consumer realizes that a store brand is as good as a name brand, this switch sometimes becomes permanent. The way for name brand producers like Clorox to combat this challenge is to introduce innovative products that stores are not willing or able to reproduce.
A second issue was the company's SG&A expenses were up 16%. While I understand the need for IT and R&D spending, I'm not sure how the company justifies higher incentives when earnings were flat. It seems that these incentives should be tied more closely to bottom line earnings. With revenue up over 7%, it's a shame that largely due to increased SG&A that EPS didn't change.
Third, investors need to watch Clorox's free cash flow. In the most recent quarter the company generated $206 million in free cash flow, but paid out $237 million in dividends. This isn't a problem if it's just for one quarter, but it's something to keep an eye on.
On a positive note, Clorox cut their long-term debt from $2.13 billion to $1.57 billion. Anytime a company with $4 billion in assets, eliminates $555 million in long-term debt it's a big deal. This will save the company money on interest expense, and should help cash flow and earnings per share.
Long story short, Clorox's future depends a lot on what the company can do to push forward its more profitable lines and introduce innovative products. The Burt's Bees division should get more cross pollination (sorry, couldn't resist) with the company's other divisions. This lack of brand connections seems to be a problem across Clorox. This is a disservice to the company, because customers' positive experiences with these other brands should be connected to Clorox. The company's stock is not what I would call cheap at nearly 17 times next year's earnings. However, this is mitigated somewhat by the company's 3.5% dividend yield. If Clorox can further integrate their divisions, this might help the public realize all of these great brands belong to the same company. Clorox says they, “make life better everyday.” Better brand awareness could make shareholders' lives better indeed.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of The Clorox Company. Motley Fool newsletter services recommend The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.