CLX Financial Analysis

Analysis Date: 2/4/2025

Business Model

Clorox operates through four reportable segments: Health and Wellness, Household, Lifestyle, and International. Revenue is generated from the sale of consumer and professional products across these segments, encompassing various brands like Clorox, Glad, Kingsford, Hidden Valley, and Burt's Bees.

Revenue Sources

• Health and Wellness: Cleaning and disinfecting products (Clorox, Pine-Sol, Tilex, Liquid-Plumr, CloroxPro, Clorox Healthcare)
• Household: Bags and wraps (Glad), cat litter (Fresh Step, Scoop Away), grilling products (Kingsford)
• Lifestyle: Food (Hidden Valley), water filtration (Brita), natural personal care (Burt's Bees)
• International: Products sold outside the U.S. across various categories and brands

Income Statement Analysis

• Net sales decreased by 15.3% due to lapping the impact of retail inventory restoration following the August 2023 cyberattack and divestitures. (Con)
• Gross profit decreased by 14.8% but gross margin improved slightly by 30 basis points, indicating improved profitability despite lower sales. (Pro)
• Selling and administrative expenses decreased by 13% due to lapping cyberattack costs and divestitures, showing improved cost control. (Pro)
• Advertising costs increased by 2.7% reflecting continued investment in brand support. (Pro)
• Research and development costs decreased slightly by 3.1%. (Neutral)
• Interest expense decreased by 15.4% indicating lower borrowing costs or reduced debt. (Pro)
• Other (income) expense, net significantly increased, primarily due to cyberattack insurance recoveries in the current period. (Pro - one-time benefit)
• Earnings before income taxes significantly increased by 74.3% and Net earnings increased by 102.1% due to lapping pension settlement charge and cyberattack expenses in the prior year and cyberattack insurance recoveries in the current year. (Pro - but impacted by non-recurring items)

Balance Sheet Analysis

• Cash and cash equivalents increased significantly by 43.6%, indicating improved liquidity. (Pro)
• Receivables, net decreased by 13.2%, potentially indicating efficient collection or lower sales at the end of the quarter. (Neutral to Pro if efficient collection)
• Inventories, net decreased by 7.1%, which could suggest efficient inventory management or anticipation of lower sales. (Neutral to Pro if efficient management)
• Prepaid expenses and other current assets increased significantly by 67.0%, reason to investigate further, could be related to ERP transition. (Neutral, needs further context)
• Total Current Assets remained relatively stable with a slight increase of 0.6%. (Neutral)
• Property, plant, and equipment, net decreased by 5.5%, possibly due to depreciation outpacing capital expenditures. (Neutral)
• Other intangible assets, net decreased significantly by 49.0%, reason to investigate further, could be related to amortization or divestiture. (Neutral, needs further context)
• Notes and loans payable increased dramatically by 4625.0%, indicating a significant increase in short-term borrowing. (Con, needs further context)
• Total Current Liabilities increased by 9.9%, driven by increase in notes and loans payable. (Con, driven by short term debt)
• Retained earnings decreased significantly by 72.8%, likely due to dividend payouts and treasury stock purchases exceeding net income. (Neutral - capital allocation decision)
• Treasury stock, at cost increased by 13.5%, reflecting share repurchase activity. (Neutral - capital allocation decision)
• Total Stockholders’ Equity decreased significantly by 75.4%, primarily due to the decrease in retained earnings and increase in treasury stock. (Con, driven by capital allocation and lower retained earnings)

Capital Allocation

The company's capital allocation strategy is evident in the cash flow statement. It includes dividend payouts to stockholders and significant treasury stock purchases, indicating a return of capital to shareholders. Capital expenditures are ongoing, suggesting reinvestment in the business. The divestiture also indicates portfolio management and potentially reallocation of capital towards core businesses. Further details in management commentary would provide a more comprehensive understanding of their capital allocation priorities and strategies.

Management Commentary

Achieved better-than-expected results across sales, margin and EPS in the second quarter due to our strong demand creation plans, which also supported our share growth.

Our results underscore the resiliency of our portfolio as we continue to invest in our brands to deliver superior value to win with consumers at a time when they need it most.

We are further advancing our transformation as we embark upon a significant milestone with our Enterprise Resource Planning transition in the U.S., resulting in our updated outlook.

Organic sales decreased 9% in Q2, primarily due to lapping the impact of retail inventory restoration following the August 2023 cyberattack and the divestitures of the VMS and Argentina businesses.

Adjusted EPS decreased 28% to $1.55 from $2.16 in the year-ago quarter, primarily due to lower net sales, partially offset by cost savings.

Overall Sentiment: Cautiously optimistic. Management highlights positive aspects like better-than-expected results and portfolio resilience, emphasizing brand investment and transformation progress. However, they acknowledge sales decline and adjusted EPS decrease due to lapping prior year's cyberattack recovery and divestitures, suggesting near-term headwinds while remaining confident in long-term strategy.

Recommendation

Rating: Hold

Reason for Rating: Hold recommendation based on mixed signals. Strong gross margin improvement and operating cash flow are positive, but sales decline and adjusted EPS decrease in the short term raise concerns. The ERP transition adds uncertainty in the near term. Long-term potential is present, but near-term performance is still navigating headwinds and non-recurring items.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/4/2025, 8:22:10 AM