Q2 2024 Earnings Summary
- Clorox has made strong progress in rebuilding inventories and distribution after the cyber incident, restoring inventories faster than expected and is confident in fully restoring distribution and market share.
- The company is increasing its advertising and promotional spending to 11% of sales this year, with the back half closer to 12%, aiming to drive value superiority and top-line growth.
- Clorox expects to improve gross margins by about 200 basis points this fiscal year and is committed to rebuilding gross margins back to pre-inflation levels over time while continuing to invest in strategic initiatives.
- Clorox is facing significant cost inflation across the supply chain, including commodities and logistics, exacerbated by severe inflation and currency devaluation in Argentina, forecasting almost 300% inflation in that economy, which may pressure gross margins.
- The company expects a modest slowdown in category growth rates due to increased consumer pressure and value-seeking behaviors, which could negatively impact volumes and top-line growth.
- Clorox faces challenges in fully restoring distribution and market share in certain categories, particularly in trash bags and cat litter, where aggressive competition and increased promotional activity may affect margins and delay recovery.
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Gross Margin Outlook
Q: What's the outlook for gross margins and recovery to prior levels?
A: Clorox expects gross margins to be around 41.5% in the back half, similar to the front half, leading to about a 200 basis point improvement for the full year. They remain committed to rebuilding gross margins back to the prior level of 44%, with further progress anticipated in fiscal 2025, driven by cost savings and a more normalized cost environment. -
Argentina FX Impact
Q: How will Argentina's FX headwinds and inflation affect results?
A: Clorox anticipates increased FX headwinds due to Argentina, now expecting about 5 points of FX headwinds on the top line versus the initial 2 points. They project the Argentine peso to devalue by about 75%. However, through incremental pricing actions, they aim to fully offset the negative impacts on both sales and gross margin, excluding an expected $0.20 P&L charge from remeasurement losses. -
Volume vs. Price Mix
Q: How is volume versus price mix expected to impact sales?
A: Clorox expects improving volume trends in the back half, transitioning from high single-digit volume declines in the front half. Price/mix will contribute less, as U.S. pricing has been lapped, but incremental pricing in Argentina will help. Overall, they anticipate stronger organic sales growth in the back half compared to the front half. -
Recovery from Cyber Incident
Q: Has Clorox fully recovered shelf space and distribution post-cyber incident?
A: Clorox has restored the majority of inventories, reducing distribution point losses from over 30% at the low point to mid-single digits. However, categories like trash bags and cat litter are still behind due to supply challenges. They expect to make significant progress in the back half, but full recovery may extend into fiscal 2025. -
Promotional Environment
Q: How is the competitive and promotional environment changing?
A: Clorox expects increased trade spending and a return to more normalized promotional levels in the back half, but not exceeding pre-pandemic levels. They are not seeing abnormal competitive pressures, though some aggressive promotion is noted in categories like cat litter. They continue to invest in advertising, targeting about 11% of sales for the year, and closer to 12% in the back half. -
Consumer Behavior
Q: What is the outlook on consumer demand and category growth?
A: Clorox anticipates a modest slowdown in category growth rates due to increased consumer pressure but expects resilience in household essentials. They observe value-seeking behaviors, with consumers trading up to larger sizes or premium products. The impact on categories is expected to be moderate, consistent with previous times of consumer stress. -
Strategic Initiatives
Q: Has the cyber incident affected long-term strategic initiatives?
A: Clorox remains committed to its strategic priorities, including digital transformation and operating model changes. While there were some delays in technology implementations like ERP during the cyber event, they are proceeding with their plans and remain on track to achieve long-term top-line growth targets of 3% to 5% and EBIT margin expansion of 25 to 50 basis points annually. -
Cold and Flu Season Impact
Q: How will the cold and flu season affect results?
A: The current cold and flu season aligns with pre-pandemic patterns, starting later than last year. Clorox expects a more normalized impact, primarily in the third quarter, which is factored into their outlook. -
Logistics Costs
Q: Did logistics costs impact gross margins as anticipated?
A: Despite expectations of elevated logistics costs due to increased shipping to restock retailers, Clorox managed to execute efficiently without incurring significant upcharges. They utilized their carriers and full truckloads, avoiding the higher costs they had anticipated.