Steve Jobs is constantly hailed as a great marketer, but the man has amazing gadgets to sell. You want to see marketing? Look at Clorox (CLX): its biggest product, liquid bleach bearing the corporate name, couldn’t be more of a commodity. One would expect consumers to choose the cheapest brand.
And yet, a few blocks from where this is being written, in a Chicago supermarket, Clorox brand bleach claims about three quarters of the shelf space allotted to the category, and it’s priced at an iPhone-like premium of 43% above the competition: $3.99 for a 1.42 gallon jug of Clorox vs. $2.79 for the store brand.
Never mind what that says about the sanity of bleach buyers. Clorox has taken the Procter & Gamble (PG) playbook – build big market shares, advertise the crap out of the stuff and ram through price increases as often as possible, and run factories and distribution ever cheaper to fatten margins – and applied it with vigor in recent years. And the stock, since its low in the spring of 2000, has moved steadily upward.
It isn’t easy. Sales of late are essentially flat.
And volume in some product lines has declined. So raising prices is crucial. A 10% hike in bleach prices in August 2008 stuck, as did a 7% hike that same month on Hidden Valley Ranch salad dressing. But a 7% price increase in February 2008 on Glad trash bags, the company’s second biggest product, was rescinded in May 2009, under competitive pressure.
To persuade consumers the stuff is worth the price, Clorox spends nearly 10% of sales on advertising, or $518 million in the fiscal year ended June 30.
Taking costs out is crucial, too. In fiscal 2010, Clorox cut costs in its cleaning products business by $34 million, consolidating manufacturing and distribution operations. Good blocking and tackling. Altogether, the margins on Clorox’s $5 billion or so in annual sales are remarkable, given the prosaic nature of the products.
This performance is all the more noteworthy given that Wal-Mart (WMT), retailing’s biggest penny pincher, accounts for 27% of Clorox sales.
Clorox is just as aggressive managing its finances, and this should cause some concern. Its current ratio, a measure of liquidity, is low, with current liabilities often bigger than current assets.
Clorox has built up debt and forsaken equity in recent years.
An ever-rising dividend and buybacks use up a lot of the cash.
That’s what companies in mature markets have been driven to do in recent years to nudge their shares along, of course. Even with all that nudging, Clorox isn’t all that pricey, trading at a lower multiple than P&G.
Its dividend yield is about 3.3% and its earnings yield above 7%. The YCharts proprietary valuation system finds Clorox undervalued. So, if the highly-leveraged balance sheet doesn’t make you queasy, Clorox shares are worth a look.