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    Clorox Co (CLX)

    Q4 2024 Earnings Summary

    Reported on Jan 6, 2025 (After Market Close)
    Pre-Earnings Price$134.14Last close (Aug 1, 2024)
    Post-Earnings Price$142.00Open (Aug 2, 2024)
    Price Change
    $7.86(+5.86%)

    What went well

    • Clorox expects to return to pre-pandemic gross margins in fiscal year '25, driven by strong progress in margin transformation programs, cost savings initiatives, and digital transformation efforts, which are leading to sustained margin expansion and providing flexibility to invest in growth opportunities.
    • The company is focused on innovation and delivering superior value to consumers, with successful product launches like Clorox Scentiva achieving its largest quarter in Q4, and strong innovation plans in key categories like Litter for fiscal year '25, which are expected to drive market share growth and share gains in fiscal year '25.
    • Strategic portfolio optimization through the divestiture of Argentina and the sale of the VMS business reduces volatility, allows focus on growth opportunities in core businesses, supports margin expansion, and confirms their long-term 3% to 5% organic sales growth outlook.

    What went wrong

    • Clorox has experienced significant market share losses due to supply disruptions, including a cyber attack that caused distribution to be down by one-third and resulted in a loss of five full share points. The company ended June down 0.3 percentage points in share and acknowledges that market share is "not exactly where we want it to be right now."
    • The company's Burt's Bees brand has been weak for a long period of time, facing supply issues due to a supplier fire and compounded by the cyber attack. Additionally, Burt's Bees competes with companies that spend significantly more on marketing (over 30%) compared to Clorox's 14% spend, raising concerns about competitiveness in that segment.
    • Clorox is not increasing advertising and marketing spending as aggressively as some competitors, despite acknowledging increased promotional intensity and market share losses. Competitors are increasing advertising and trade promotions across the board, but Clorox plans to maintain its advertising spend at 11% to 11.5%, which may hinder its ability to regain lost market share.

    Q&A Summary

    1. Top Line Growth Outlook
      Q: How do you expect top line growth, volume, and pricing to evolve?
      A: Linda Rendle stated that they expect consumers to remain under pressure, leading to low single-digit category growth. They anticipate volume growth driven by superior value and innovation, aiming for 3% to 5% organic sales growth. While pricing is holding in the marketplace, they expect modestly negative pricing due to increased trade spending.

    2. Gross Margin Improvement
      Q: What are your expectations for gross margin improvement next year?
      A: Kevin Jacobsen explained that they expect gross margins to fully recover, adding another 100 basis points to reach pre-pandemic levels. This will be supported by over 200 basis points of cost savings and benefits from portfolio reshaping, including the divestiture of Argentina and the anticipated sale of the VMS business.

    3. Household Segment Challenges
      Q: What are the issues in the Household segment, especially with Glad and Litter?
      A: Linda Rendle described that the Household segment underperformed due to weather impacting the grilling business and delayed distribution recovery in Glad and Litter. While Glad's distribution was fully recovered by the end of the quarter, Litter recovery will take longer due to consumer behavior and increased competitive activity.

    4. Advertising and Marketing Spend
      Q: Are you increasing advertising and marketing spend to regain market share?
      A: Linda Rendle stated they plan to maintain advertising and sales promotion spending at 11% to 11.5% of sales, similar to last year. They believe this strikes the right balance to support growth but are prepared to invest more if needed to win back consumers.

    5. EBIT Margin Recovery
      Q: When do you expect EBIT margins to return to historical levels?
      A: Kevin Jacobsen mentioned that they have been rebuilding EBIT margins from 12% in fiscal year '22 to about 15% last year, and are targeting 17% to 17.5% this year. They expect to fully rebuild EBIT margins to historical levels of around 18% by the end of the year.

    6. Impact of Divestitures on Growth
      Q: Does the 3%–5% organic sales growth outlook still hold after divestitures?
      A: Linda Rendle confirmed that despite divesting Argentina and the VMS business, the 3% to 5% long-term organic sales growth target remains intact. These moves reduce volatility and support more consistent and profitable growth.

    7. Cash Flow and Shareholder Returns
      Q: How did cash flow perform, and will you increase shareholder returns?
      A: Kevin Jacobsen reported they are targeting about 12% free cash flow as a percent of sales in fiscal year '25. With strong cash flow and a low debt-to-EBITDA ratio, they have restarted their share repurchase program, aiming to return $250 million to $300 million to shareholders.

    8. Promotional Activity Impact
      Q: How is increased trade spending affecting margins?
      A: Kevin Jacobsen noted that trade spending will modestly offset growth, especially in the front half of the year as they return to normalized levels of promotion. They expect a bit of increased trade spending, which will be a modest drag on gross margins.

    9. Digital Transformation Progress
      Q: How is the digital transformation progressing, and when do you expect benefits?
      A: Linda Rendle shared that they successfully completed the first wave of their ERP and global finance rollout in Canada. The bulk of the value and benefits from the digital transformation are expected in fiscal year '26 and beyond, once the ERP implementation is complete.

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