Clorox (CLX) Up 4.3% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Clorox (CLX). Shares have added about 4.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Clorox due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Clorox Beats Q2 Earnings & Sales Estimates

Clorox reported second-quarter fiscal 2020 results, wherein both earnings and sales beat estimates. Further, the company updated its view for fiscal 2020.

Quarterly earnings from continuing operations of $1.46 per share increased around 4% year over year and beat the Zacks Consensus Estimate of $1.31. The bottom-line beat was mainly driven by increase in gross margin.

The company posted net sales of $1,449 million, which declined nearly 2% year over year but surpassed the Zacks Consensus Estimate of $1,429 million. Further, sales remained flat on an organic basis. The soft top-line result was caused by unfavorable currency. Currency headwinds hurt sales by nearly 2 percentage points.

Driven by the recent price increases and cost savings, Clorox witnessed gross margin expansion of 40 bps to 44.1% in the fiscal second quarter. This marked the company’s fifth straight quarter of gross margin expansion. The rise in gross margin was driven by gains from cost savings and price increases. However, the gains were marred by higher trade promotion spending as well as increased manufacturing and logistics costs.

Segmental Discussion

Sales of the Cleaning segment remained flat at $501 million on decline in Laundry and unfavorable mix from strong growth in non-tracked channels. However, this was offset by growth in Professional Products and Home Care businesses.

The Household segment’s sales declined around 8% to $360 million mainly due to declines in Grilling, and Bags and Wraps businesses. Bags and Wraps sales were impacted by increased competitive activity as well as distribution losses. Further, the Grilling business delivered soft sales due to lower shipments in order to finish working through elevated retail inventory from the prior year. This was partially offset by sturdy consumption growth.

Sales at the Lifestyle segment rose 4% to $347 million. Results were aided by growth in the Natural Personal Care business, driven by innovation in Burt's Bees Lip Care and Face Care categories. Also, the Food and Water Filtration businesses contributed to segment sales growth.

At the International segment, sales decreased 2% to $241 million from the year-ago quarter. The segment sales were negatively impacted by adverse currency fluctuations to the tune of 8 percentage points mainly from Argentina, partly offset by gains of favorable price mix. Organic sales for the segment rose 6%.

Financials

Clorox ended the fiscal second quarter with cash and cash equivalents of $168 million, and long-term debt of $2,288 million. For the first six months of fiscal 2020, the company generated $498 million of net cash from continuing operations.

Fiscal 2020 Guidance

Clorox updated its outlook for fiscal 2020. It continues to project sales between low-single digits decline and up 1% in fiscal 2020. This indicates a slightly more favorable foreign exchange impact, offset by improved promotional spending.

However, it now expects organic sales growth of flat to 2%, compared 1-3% growth mentioned earlier.

Gross margin is now estimated to be slightly up driven by lower input costs. The company had earlier projected gross margin decline for fiscal 2020. Advertising and sales promotion spending is now anticipated to be more than 10% of sales. Selling and administrative expenses are still projected to be nearly 14% of sales. The company continues to envision effective tax rate of 22-23% for fiscal 2020.

Management now anticipates earnings per share of $6.10-$6.25 for fiscal 2020, compared with $6.05-$6.25 expected earlier.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

Currently, Clorox has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Clorox has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.