Clorox (CLX) Gains 35% In 6 Months: Will The Rally Continue?

The Clorox Company (NYSE:CLX) is performing exceedingly well on the back of smooth execution of its 2020 plans, expansion of e-commerce capabilities and Go Lean strategy. Also, the company is benefiting from strategic acquisitions and product innovations. This, in turn, is leading to higher volumes, thus boosting the top line.

The company boasts a robust earnings surprise history, having surpassed estimates for the eighth straight quarter, when it reported first-quarter fiscal 2019 results. Moreover, sales exceeded estimates in four of the trailing six quarters. Both the top and bottom line in the quarter also improved year over year. While earnings benefited from a lower tax rate along with higher sales and gains from cost savings, sales were driven by benefits of the Nutranext acquisition besides higher volumes and increased prices.

Despite a solid start in fiscal 2019, Clorox trimmed its earnings guidance for the fiscal year. Management anticipates earnings from continuing operations to be in the range of $6.20-$6.40 per share, down from $6.32-$6.52 projected previously. This guidance was slashed mainly due to the expectations of making fewer share repurchases in fiscal 2019 than nearly 50% of its $2-billion share repurchase authorization guided earlier. Also, adverse impacts from foreign currency and higher costs negatively impacted earnings forecast. Moreover, elevated commodity and logistics expenses are hurting gross margins.

Nevertheless, shares of Clorox have surged 34.7% in the past six months, outperforming the industry’s 12.9% rally. Impressive earnings history and strategic efforts led to this outperformance. Also, the company’s expected long-term earnings growth rate of 6.5% with a Growth Score of A drives optimism on the stock.

Let’s Take a Look at Clorox’s Strategic Efforts

Clorox’s 2020 Strategy is focused on boosting growth at various categories and expanding overall market share. Also, it is aimed at achieving certain long-term aspirations, including net sales growth of 3-5%, increasing EBIT margin by 25-50 basis points and generating free cash flow of 10-12% of sales, all on a yearly basis. This is expected to be achieved through key accelerators like investment in brands; development of e-commerce; technological advancements; enhancement of growth culture and focus on the 3Ds - desire, decision and delight.

Additionally, Clorox is keen on making strategic partnerships with retail customers and evolving capabilities both offline and online. Over the past few years, the company has boosted its digital capabilities leading to a strong performance in e-commerce, which is now a significant revenue contributor. Moving ahead, the company is well on track to attain its 2020 target of $500 million from e-commerce sales.

Clorox's diversified brand portfolio along with its Go Lean strategy is encouraging as well. The company remains committed toward investing in product and brand differentiation to safeguard value proposition. Backed by the Go Lean strategy, Clorox is consistently making efforts to improve margins through operational efficiencies and improving productivity.

We believe all these strategies will help the company to overcome near-term challenges and continue with its upside run on the index.

Currently, Clorox has a Zacks Rank #3 (Hold).

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