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This report was generated using published research from our Consumer Staples team led by Sector Head Daniel Biolsi.
Executive Summary
Clorox (CLX), a leading manufacturer of consumer and professional products, including a wide range of cleaning supplies and household items, presents a compelling bullish case. As a significant beneficiary during the pandemic, the company has demonstrated resilience and adaptability since peak COVID hype has faded. Despite the post-pandemic hangover, the return of essential volume is tilting towards an imminent return to growth for Clorox. This report delves into the company’s pricing power, organic growth prospects, valuation, and the strategic positioning that underscores its bullish outlook.
Brand Strength and Pricing Power
Clorox boasts a robust portfolio of brands, with 80% of its sales stemming from brands holding the #1 or #2 market share in their respective categories. The company’s well-known brands include Glad, Hidden Valley, Liquid-Plumr, Pine-Sol, Kingsford, Brita, and of course Clorox. This dominant market position is not merely a testament to the company's brand strength but also a critical lever for pricing power.
In the face of recovering supply chains and ongoing price increases, a key question emerges: Can Clorox maintain its pricing power, especially as consumers face the temptation of switching to private labels? The company's track record and strategic pricing initiatives suggest a strong ability to recapture lost gross margins, crucial for its profitability and long-term growth.
Pandemic Performance and Future Outlook
Clorox's cleaning brands emerged as significant winners during the pandemic, benefiting from heightened consumer demand for cleanliness. As we transition to a post-pandemic world, understanding the base level of demand for cleaning supplies is essential. The evidence points towards a structural shift in consumer behavior, with an increased emphasis on cleanliness that is likely to persist. This shift bodes well for Clorox, positioning it to continue capitalizing on this elevated demand baseline.
Financial Health and Valuation
Clorox had 7.4 billion in net sales in FY23, but operating margins were 600bps below 2020 levels. The company's valuation, selling at a one-third premium to its pre-pandemic historical valuation, reflects the market's optimistic outlook on its growth trajectory and ability to recapture margins lost during the inflationary surge over the last couple of years. With consensus expectations embedding a significant expansion in gross and EBITDA margins, Clorox is poised for further margin recovery and earnings per share (EPS) upside, supported by its strategic pricing and cost management initiatives.
Margins Recovery and Cost Management
The company has embarked on its fourth round of price increases, benefiting from strong brand recognition and category leadership. With gross margins expanding significantly in recent quarters and expectations of continued margin expansion, Clorox is on track to recover to its long-term margin targets. Despite facing 1.6 billion of inflationary cost pressures since the pandemic onset, Clorox's strategic cost management and pricing strategies have enabled it to navigate these challenges effectively. The company's significant sales from cleaning products (42%) and its major retail partnerships, such as with Walmart, underscore its resilience and strategic market positioning.
Conclusion
In conclusion, Clorox represents a compelling investment opportunity for those looking to capitalize on the company's strong market position, brand strength, and favorable market trends. With a clear path to margin recovery, sustained demand for its core product lines, and strategic initiatives to navigate inflationary pressures, Clorox is poised for continued success. Investors seeking exposure to a company with solid growth prospects, strong brand equity, and a proven ability to manage through market cycles should consider Clorox as a bullish addition to their portfolio.
