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Summary

  • Competitive pressure from peers has affected the company’s financial performance.
  • Efforts to improve market share will benefit the company’s future performance.
  • Plan to grow top-line and bottom-line through innovation, cost cuts and pricing reforms, signals promising future outlook.

I reiterate my bullish stance on Clorox Company (NYSE:CLX). The company continues to face intense competition in the industry. The recent financial performance of the company may seem pressurized due to competition and negative currency impacts from outside U.S. operations. But with its commitment to excel through innovation, cost control efforts and pricing reforms, the company will be able to address competition. As the company sticks to its plan of improving market share in all product categories through aggressive investments, I believe CLX has so much to offer to its investors by generating long-term growth.

CLX's recent quarter's revenue was down 2% year-over-year. The company's soft top-line results were led by the thinning of revenues from its cleaning, lifestyle and international segment. Whereas the company's household segment tried its best to rescue the revenue decline by posting positive results for Q3 FY14.

Household Segment = Holds More

The recent quarter's increased shipments and sales of Kingsford and Glad products drove the volume and sales of the household segment by 5% and 4% year-on-year, respectively. The premium trash bags prepared by "Glad" are an important revenue driver of the household segment. The company now covers 32% of the $2.4 billion-worth U.S. trash bag category. Moreover, cat litter also added to the volume growth of CLX's household category. I believe the company's strong share in the U.S. trash bag category and its plan to introduce Fresh Step Extreme Light Weight in the cat litter category will keep growing the company's market presence, thereby fueling the household segment's revenue base.

Countering competition

In a world where demand for fast bacteria-killing disinfectants is rapidly growing, the manufacturers of disinfectants in the U.S. consumer sector are exposed to intense competition for the production and innovation of disinfectants. As companies like Procter & Gamble (NYSE:PG) and Kimberly-Clark (NYSE:KMB) increased their investments to produce innovative disinfectants, CLX faced massive pressure on its cleaning segment's results. The company lost its disinfectant market share to its peers due to the introduction of PG's newly developed disinfectant range, which meets tough European Union standards in the field of sanitation. Also, the introduction of KMB's 24-hour sanitizing spray for surface disinfectants lifted the scale of the competition for the company's cleaning segment. Due to these competitive headwinds on the company's disinfecting wipes category, CLX lost 5% of its cleaning segment's volumes, bringing down the segment's revenue by 4% year-over-year in 3Q FY14.

However, the company has mapped out its plan of action to fight the competitive pressure by supporting its disinfecting wipes category's business across its 3D demand-building model, including increased consumer promotions. The entire idea behind this escalated level of promotion is to highlight the value of its disinfecting wipes to users to make them see the way CLX's disinfecting wipes are ahead of its peers' products. I believe CLX's initiative to get noticed by customers through advertisements may pressurize its profits, contracting margins in the near future, but in the long run, these initiatives will portend well to grow the revenue of the cleaning segment.

King of Bleach needs to take serious Actions in Laundry

CLX has a strong presence in the U.S. laundry care market. In 2013, the company's share accounted for 59% in the bleach category. However, CLX continues to face tough competition from PG's leading detergent brands. The U.S. laundry care offers strong growth potentials; to fully enjoy these growth potentials, CLX needs to ramp up its efforts in the detergent category. Whereas, its bleach category will keep on adding to its cleaning segment growth.

International Segment Remains Important Growth Driver

Although 3Q FY14's international segment sales were down 6% year-over-year due to currency headwinds, mainly from the weakening of Argentina, Venezuela, Canada, Chile and Australia currencies, but with its huge investments in widely recognized brands, the volume of the international segment increased 1% year-over-year. As CLX is modestly growing its international presence, I believe as soon as currency headwinds in the international segment moderate, the company will notice a gradual pickup in its international segment revenues with its globally recognized brands.

Contracted Margins will Stabilize Soon

CLX saved $21 million in cost in its efforts to stay on track of getting a leaner cost structure in 3Q FY14. But the pressurized sales base and the inflated manufacturing and logistics cost from the international segment nearly offset the impact of cost savings, dragging down margins 30 basis points year-over-year in 3Q FY14. Going forward, the company will further increase pricing in the international segment to offset the impact of inflated manufacturing and logistics costs. I believe the internationally recognized brand of CLX will maintain its volume growth despite price increases, which will expand the international segment's revenues and margins.

Moreover, the company plans on doubling its cost saving initiatives, which will help the company finance available growth investments to grow the sales base and improve margins. In addition, the earnings base of CLX will also benefit from these efforts.

Conclusion

I am bullish on CLX. The competitive pressure from peers has affected the financial performance of the company. But its efforts to improve market share will benefit the company's performance in the future. The company's plan to grow the top-line and bottom-line through innovation, cost cuts and pricing reforms, signals a promising future outlook for the company.

Source: Clorox Company Making All The Right Moves To Keep Its Future Secured