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CLX AT A GLANCE

P/E ► 14.5 AVG EV/EBITDA ► 9.09 AVG ROA ► 15.7% HIGH Debt to Equity ► -98.8   Current Ratio ► 0.644 VERY LOW Interest Coverage Ratio ► 6.61 AVG

 

 

 

 

 

 

The Clorox Company (NYSE: CLX) is a manufacturer of cleaning products, bleaches, water filters and food products. It's flagship product, Clorox, has become synonymous with bleach, and its other brands are also widely known; 93 of its brands are the No 1. or No 2. in market share in their respective markets.^[1]

In 2007, Clorox acquired Colgate-Palmolive Company (CL) Bleach, expanding its presence to both Canada and Latin America. Despite its attempts to become a more global company, Clorox is still heavily dependent on the slower growing North American market for the vast majority (84.2%) of its sales in 2008.^[2]

Clorox's operating margins are vulnerable to increases in commodities prices. Plastic resin costs account for an average of 6% of Clorox's cost of goods.^[3] Moreover, Clorox anticipates manufacturing expenses to increase $180 to $200 million in FY2009 due to increases in commodities prices.^[4] In addition, continued consolidation among retailers of household products has limited the extent to which Clorox can pass these higher costs onto its customers. Overall, rising prices dragged gross margins down by 2.7% in 2008 and 1.1% in 2007.^[5]

In the fourth quarter of fiscal 2009, Clorox reported earnings per share of $1.20, topping average analyst expectations of $1.19, and revenue of $1.5 billion.^[6] However, the company said it may struggle to increase sales in the first quarter of fiscal 2010, especially since Wal-Mart (WMT) is not yet selling the company's new Green Works laundry detergent in the United States.^[6] In addition, the income boost from lower commodity casts will likely be less than originally forecasted. ^[6]

Since H1N1 was reported in the US in April 2009, the pandemic has boosted demand from Clorox's cleaners, hand sanitizers, and facial masks. Analysts expect the company's first quarter of fiscal 2010 results to have a healthy boost from increased demand for healthcare supplies. ^[7]

Company Overview

Clorox is best known for its production of its namesake bleach but also manufactures laundry additives, cleaning items, water-filtration systems and food products. Clorox's products are sold in over 100 countries under two operating segments: North America and International.

• North America (84.2% of revenue, 85.2% of operating income^[2]): Offerings include laundry products, home-care cleaning products, water-filtration systems, professional and auto-care products sold in the US, as well as all products sold in Canada. Revenue from the United States itself accounted for 80.4% of sales in fiscal year 2008. ^[8]
  • Laundry products such as liquid bleaches, laundry stain removers, and both dry and liquid color-safe bleaches are sold under the Clorox and Clorox 2 brands.
  • Home-care cleaning products such as disinfecting and sanitizing sprays, wipes, toilet-bowl cleaners, dilutable and spray glass surface cleaners, carpet cleaners, reusable cleaning cloths, drain openers, steel-wool soap pads, scrubber sponges, mildew removers, soap-scum removers, bathroom cleaners, floor mopping systems, toilet cleaning tools, daily shower cleaners and pre-moistened towelettes are primarily sold under the Clorox, Formula 409, Liquid-Plummer, Pine-Sol, Tilex and S.O.S brands. Additionally, the company has made several acquisitions, such as Burt's Bees, in order to stay amid shifting consumer preferences.^[9]
  • Water filtration systems are sold under the Brita brand.
  • Auto-care products such as protectants, cleaners and wipes, tire- and wheel-care products, washes, waxes and automotive fuel and oil additives, are sold under the Armor All and STP brands.
  • Professional products are sold to the institutional, janitorial, healthcare and food-service markets under some of the same brands listed above.

• International (15.8% of revenue, 13.8% of operating income^[2]): The International segment includes all products sold outside of the US and Canada. International sales generated $833 million in net sales in 2008.^[10] A wide range of products from the North America segments and a few additional items such as brooms, candles, air fresheners, fabric refreshers and insecticides are offered under various brands internationally. Sales of liquid bleach continue to drive revenue in the international segment, generating 26%, 24%, and 23% of net sales in the years 2008, 2007, and 2006, respectively. ^[2]

Clorox 2008 Total Net Sales by product ^[2]

CLX FY2008 Revenue, Net Income, and Operating Margin ^{[11] [12] [13]}

Clorox 2008 North American market share by product ^[14]

Customers

Most of Clorox's products are advertised and sold in the United States to wholesalers, retail stores, and grocery stores.^[15] The company also sells janitorial, healthcare, and food-service versions of its products through distributors. Outside the United States, Clorox sells products through licensees and third-party distributors.^[15] From 2006-2008, Walmart Stores Inc. accounted for 26% of Clorox's net sales, primarily within the North America segment. No other customers exceeded 10% of net sales.^[2]

Trends and Forces

Dependence on saturated North America

With foreign sales accounting for only 19.6% of total revenue in 2008, Clorox is highly dependent on the domestic US household and personal product market.^[8] This limited international exposure is a source of concern for the company in the long run, since spending on Household and Personal Products (HPP) is growing slowly in North America. One particular market segment Clorox started to target in 2008 are Hispanic customers, which account for $34 billion worth of consumer packaged goods a year in the U.S., a number that is projected to grow to $52 billion by 2015.^[16] According to a Clorox study, more than 70% of Hispanic grill owners own a charcoal grill, that almost 70% of the Hispanic population grills year-round, and that the most important concern for Hispanics is for charcoal to last longer for social gatherings.^[17] In turn, the company has introduced Kingsford charcoal briquets (with technology that lights faster and burns longer). A new advertising campaign targeted Hispanic markets kicked off in March 2008 titled "Let the Barbecue Go On!"^[17]

Sensitivity to commodities prices

Industrial Producer Price Index, % Change From One Year Ago^[18]

Rising oil, plastic resin, and other input prices has dragged growth in the first two quarters of fiscal 2009.^[19] Clorox uses plastic resins in a variety of products, especially in its trash bags, accounting for 6% of the company's total cost of goods.^[3] In fact, in 2008 increases in commodity costs negatively impacted gross margins by 2.70%, compared to a negative 1.10% impact in 2007.^[5] In response, Clorox has raised prices, exited the low-margin private-label trash bag manufacturing business, adjusted volume expectations, and focused on promoting higher-margin products. ^[5] The company expects commodity costs to increase $180 to $200 million in FY2009. ^[4]

Clorox also depends on a number of agricultural commodities. For example, prices of soybean oil for salad dressing and corn starch for charcoal briquettes increased sharply in 2008 into 2009.^[20] Other energy sources and raw materials such as chlor-alkali (an important input in bleach) contribute to Clorox's vulnerable manufacturing expenses. Any increase in the prices of these materials will clearly hurt Clorox's margins. In the first two months of 2009, however, producer prices have fallen, which should lift the cost pressure on Clorox in the second half of fiscal 2009. ^[18]

Rise of Private Labels

In the past decade, Clorox has faced stiff competition from private label brands or "store brands" of large retailers such as Wal-Mart, Target, and supermarket chains. Private label products often sell at lower price points and earn higher margins because the retailers can control the cost of their production. For example, Wal-Mart offers 5,500 products through its "Great Value" brand, which has increasingly sold as consumers feel the recession squeeze on their disposable income.^[21] From 2003 to 2008, sales of Target's private label products rose an average of 15% annually. ^[21]

Large retailers are close to the consumers, have the point of sale data on consumer behavior and are in better position to understand consumer behavior. These strengths contribute to better private label product development, which directly compete with Clorox products. Retailers also promote their own brands as they earn higher margins on them. ^[21] In 2008 2Q, sales volume fell 2% from last year, as retailers reduced inventory levels and consumers traded down to lower-priced private label alternatives. ^[19]

Supermarket Consolidation Risk

Retail consolidation has a high impact on product pricing. In 2008, Clorox’s top five largest customers accounted for 42% of its revenue^[2], with Wal-Mart Stores (WMT) alone accounting for 26% of the company's sales.^[2] As supermarkets consolidate, a smaller number of firms account for larger percents of Clorox’s total sales, making each of them more important to Clorox’s bottom line. This gives retailers the power to negotiate for lower prices.

The Rising Value of the Dollar

A decrease in the relative value of the dollar would hurt Clorox's bottom line. Although a falling dollar drives exports which adds to the international segment's revenues, the cost of foreign inputs (commodities that go into Clorox products) sold in foreign currencies would increase with the falling dollar. 19.6% of Clorox's sales are from outside the United States,^[8] so a depreciating dollar would drive growth in roughly one-fifth of the company's business. On the other hand, a depreciating dollar also feeds into higher input prices, which has been the larger problem for Clorox's management team.^[22] Between July and December 2008, the dollar regained nearly all its losses again foreign currencies, and has been fluctuating since then.^[23] Although Clorox uses some financial instruments to hedge against foreign currency volatility risks, it is not fully protected and favorable impacts to profit margins from exchange rates are likely unsustainable. ^[24]

Centennial Strategy

In May 2007, Clorox announced its 'Centennial Strategy' to guide it through its 100-year-old anniversary in 2013. The strategy aims to accelerate sales by growing existing brands through innovation and expanding into surrounding product categories. The company also aims to enter new sales channels and grow its business in developing markets. As part of the Centennial Strategy, Clorox acquired Burt Bee's Inc. in November 2007, a manufacturer of natural personal care products.^[25]

Competition

Clorox 2008 U.S. market share^[14]

Clorox is a relatively small firm, with revenue $5.3 billion,^[26] compared to its giant competitors Colgate-Palmolive Company (CL), Procter & Gamble Company (PG), and Kimberly-Clark (KMB), with revenues $13 billion and higher.^[27] Competition in the Household and Personal Products is exceptionally stiff. Yet Clorox maintains its domination of the bleach category with 65% U.S market share under its highly recognized Clorox Brand.^[14] In January 2009, the company announced that its Greenworks products had taken the No. 1 market share with 42% of the US natural cleaning agent market.^[28]

The household and personal product market is growing much faster in emerging markets outside of North America. In FY2008, Clorox international sales grew 16%, while North American sales grew just 10%.^[29]Most of Clorox's competitors have penetrated the global market, gaining a valuable head start in capturing global market shares. With little presence markets beyond the United States, Clorox is the least exposed of the big industry players to high-growth emerging markets.

Clorox competes with many small private brands. Clorox's closes private-brand competitors have a close #2 position in trash bags and other categories. But because private labels don't put as strong an emphasis on innovation and new product creation, they are far less burdened by the costs of new product development (and when a new product does make it big, these private companies can ride along on Clorox's coattails to produce knockoffs that cleverly sidestep the patents). Private companies also get an added advantage in the event of a commodities costs decrease: while large firms like Clorox must stick to hedge-like long term purchasing contracts, private labels can usually purchase at the current market price, reaping the benefits of a temporary downswing in raw materials costs.

Clorox also competes with Kraft Foods (KFT), Unilever NV (UN), and Reckitt Benckiser across a number of specialty group business segments, including trash bags, salad dressing, charcoal, and STP autocare products.

*2008 financials available for CLX, PG. All others are 2007.

**L'Oreal and Unilever are European companies. Currency conversions based on dollar/euro exchange rates for Dec 2007 as reported by FRBNY,^[40] provided for reference only.

References

1. ↑ ^{1.0 1.1} CLX Annual Report 2008, page 18
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7} CLX 2008 10-K, Note 22, page 59
3. ↑ ^{3.0 3.1} BusinessWeek, "Why Clorox Isn't Really Shining"
4. ↑ ^{4.0 4.1} Clorox Q4 and FY2008 Results, Operating Outlook
5. ↑ ^{5.0 5.1 5.2} Morningstar analyst report, CLX, 11 Aug 2008
6. ↑ ^{6.0 6.1 6.2} Reuters "Clorox profit tops view, outlook raises concerns"
7. ↑ Reuters "Flu-related products may lift U.S. makers' profits"
8. ↑ ^{8.0 8.1 8.2} CLX 2008 10-K, Note 22 "Segment Reporting," page 60
9. ↑ Cheap Stocks: The Clorox Company.
10. ↑ CLX 2008 10-K, Consolidated Reporting, Note 22 "Segment Reporting," page 9
11. ↑ CLX Annual Report 2008, page 22
12. ↑ CLX Financial Statements 2006
13. ↑ ^{13.0 13.1} Morningstar CLX Quick Take
14. ↑ ^{14.0 14.1 14.2} Clorox Co. 2009 CAGNY Presentation
15. ↑ ^{15.0 15.1} CLX 2008 10-K, Item 1 "Business," page 6
16. ↑ CLX Annual Report 2008, page 12
17. ↑ ^{17.0 17.1} CLX Annual Report 2008, page 13
18. ↑ ^{18.0 18.1} Federal Reserve Bank of St. Louis, Produce Price Index: Industrial Commodities
19. ↑ ^{19.0 19.1} Morningstar Analyst Report, CLX, 4 Feb 09
20. ↑ CNET, "Biodiesel plants idled by rising soybean prices"
21. ↑ ^{21.0 21.1 21.2} Reuters, "US Consumer Companies, Retailers Revisit Cheap Brands"
22. ↑ Morningstar Analyst Report, CLX, 31 Oct 2008
23. ↑ [1[id]=TWEXM&s[1][range]=5yrs Federal Reserve Bank of St. Louis]
24. ↑ CLX 2008 10-K, Item 1 "Business," page 14
25. ↑ CLX 2008 10-K, Item 1 "Business," page 4
26. ↑ ^{26.0 26.1} Google Finance, "CLX"
27. ↑ ^{27.0 27.1} Google Finance "Colgate"
28. ↑ AP, "Clorox takes top share of natural cleaners market"
29. ↑ Clorox Reports Q4 and Fiscal Year 2008 Results; Updates Fiscal 2009 Financial Outlook
30. ↑ Clorox 2008 Annual Report, "Consolidated Statements of Earnings," page 22
31. ↑ PG 2008 Annual Report, Note 12, "Segment Information," page 75
32. ↑ PG 2008 Annual Report, "P&G at a Glance," page 84
33. ↑ Unilever 2007 Annual Report, "Financial Review," page 23
34. ↑ Unilever 2007 Annual Report, "Notes to the Consolidated Accounts," page 81
35. ↑ Google Finance KMB
36. ↑ Kimberly-Clark 2007 Annual Report, Item 1 "Business," page 3
37. ↑ Colgate 2007 Annual Report,
38. ↑ L'Oreal 2007 Annual Report, Chapter 2 "Management Report," page 58
39. ↑ L'Oreal 2007 Annual Report, Chapter 1 "Consolidated Financial Statements," page 114
40. ↑ FRED "US Dollar/Euro Monthly Exchange Rate"