Earnings Preview: Clorox Corp. - Analyst Blog

Clorox Corporation (CLX) is scheduled to release its second-quarter 2011 results on Friday, February 4. The Zacks Consensus Estimate for the quarter is pegged at 62 cents a share.   

First Quarter Performance

Clorox posted a marginal decline in first-quarter fiscal 2011 earnings, slipping to 98 cents a share from 99 cents in the year-ago quarter and also lagged behind the Zacks Consensus Estimate of $1.13.

Clorox's net sales during the quarter declined 3.0% year over year to $1.27 billion, missing the Zacks Consensus Estimate of $1.37 billion. The softness was primarily attributable to lower volume, the unfavorable impact of the Venezuelan currency devaluation and higher trade-promotion spending, partially offset by increased pricing.

Total volume in the quarter dropped 2% due to lesser shipments of Glad food-storage products and Scoop Away cat litter.  

Sales and Earnings Expectations

Clorox expects fiscal second quarter 2011 sales to decline at a 3–4% clip and operating earnings to come in a band of 57 cents to 63 cents a share. The company estimates goodwill impairment to range in negative territory from $1.82 to $1.78 per share. Also, the company expects earnings of 4 cents per share from the discontinued Auto Care unit and a gain of $1.26 per share from the sale of Auto Care in the fiscal second quarter.

Clorox expects sales to grow in the range of 0–1% in the fiscal year 2011. The company incorporated the effect of weaker categories during the first half and higher level of trade spending in the second half to guide full year sales.

The company expects its new product pipeline will help it to deliver solid top-line growth in the range of 2–4% during the second half of fiscal 2011. The adverse impact of the Venezuela currency devaluation and tough year-over-year comparison are also expected to ease.

Agreement of Analysts

The analysts exhibit a negative sentiment for Clorox in the to-be-reported quarter. In the last 30 days, out of the 18 analysts covering the stock, 13 analysts moved in the downward direction for the second quarter of fiscal 2011. In the last 7 days, no analyst revisited the estimate keeping the consensus unchanged.  

A similar trend has been noticed for fiscal 2011. In the last 30 days, out of the 18- analyst coverage, 12 analysts moved in the downward direction with no movement in estimates in the past 7 days.

Magnitude of Estimate Revisions

Taking into effect the analysts' earnings revision, the Zacks Consensus Estimate for the second quarter and full year 2011 went down to a respective 62 cents and $3.99 per share from 72 cents and $4.13 per share, over the last 30 days.

However, over the past one week, the Zacks Consensus Estimate for the quarter and fiscal 2011 remained static.

Surprise History

Clorox exhibited a mixed earnings surprise trend over the last four quarters. The company recorded a minimum surprise of negative 4.4% in first-quarter 2011 while a maximum of 6.4% in third-quarter 2010. On an average the earnings surprise was 1.6%.

The current Zacks Consensus Estimates for the second quarter and fiscal 2011 show upside potential of negative 1.6% and 0.5%, respectively.

Our Recommendation

Clorox Co. is primarily engaged in the production, marketing and sales of consumer products in the U.S. and international markets. The company sells its products primarily through mass merchandisers, grocery stores and other retail outlets.  Clorox is one of the world's leading manufacturers of consumer products. Furthermore, the company possesses a strong portfolio of brands, including Clorox, Glad, Brita, Armor All, Burt's Bees, STP and Kingsford, which offer a competitive edge to the company and bolsters its well-established position in the market.

Clorox has established financial goals to measure its progress. These goals include 3% to 5% annual sales growth before acquisitions and 75 to 100 basis points of annual improvement in earnings before interest and taxes (EBIT) as a percentage of revenue. Additionally, the company has plans to carefully manage the growth of its asset base. If these financial goals are achieved, management believes it can realize double-digit economic profit growth and free cash flow of 10% to 12% of net sales.

The company has a consistent track record of returning cash to shareholders in the form of regular dividend payments and share buybacks.  Clorox intends to buy back 12 - 13 million of its common stock in the fiscal year 2011.

However, the company faces intense competition from other well-established consumer product companies both in the U.S. and in its international markets. Most of the company's products compete with other widely-advertised brands within each product category and “private label” brands and “generic” non-branded products of grocery chains and wholesale cooperatives in certain categories, which typically are sold at lower prices. Also, Clorox's considerable international presence exposes it to unfavorable foreign currency translations, which often affects its profitability.

Additionally, Clorox has a highly leveraged balance sheet with a long-term debt of $2.1 billion at the end of first quarter of fiscal 2011. The high debt level compromises on the company's financial flexibility as well as the ability to pursue acquisitions or expand operations organically.

Recently, Procter & Gamble Co. (PG), which competes with Clorox, reaffirmed its organic sales growth expectation of 4–6% and operating earnings in a band of $3.91 to $4.01 per share for fiscal 2011.

We maintain our “Neutral” recommendation on Clorox. The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates downward directional pressure on the shares over the near term.

 
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