Clorox Stock Decline: A Sound Investment Opportunity

Clorox (NYSE: CLX) has experienced a decline of 10.1% in its stock price year to date, primarily driven by disappointing second-quarter fiscal 2025 results. The company, known for its extensive range of products including bleach, Kingsford charcoal, and Burt's Bees, has faced significant challenges but is now on the path to recovery.

Despite the recent sell-off, Clorox offers an appealing dividend yield of 3.3% alongside an impressive track record of increasing dividends for 40 consecutive years. Investors focused on long-term income may find this stock attractive, provided there is an improvement in the company’s fundamentals. Here’s why the recent drop could create a buying opportunity.

Rebounding from Challenges

Clorox's earnings have fluctuated over the past five years due to various factors both external and internal. Initially, the COVID-19 pandemic caused a surge in demand for cleaning and hygiene products, which positively affected Clorox's sales. However, the company misjudged the longevity of this demand, making it more susceptible to supply chain challenges and rising costs.

In August 2021, Clorox laid out a comprehensive five-year strategy to enhance its operations by updating its enterprise resource planning (ERP) system and transitioning to cloud-based technologies. This initiative aims to modernize various internal processes, with total costs estimated between $560 million and $580 million.

In the fourth quarter of fiscal 2023, Clorox incurred a significant noncash impairment charge of $445 million to streamline its Vitamins, Minerals, and Supplements unit, focusing on core brands. Additionally, fiscal 2024 revealed a one-off noncash pension settlement charge of $171 million. Clorox's financials were further impacted by a costly cyberattack and the divestiture of operations in Argentina, Uruguay, and Paraguay in March 2024.

Given these challenges, assessing Clorox’s performance through adjusted earnings—which exclude one-time charges—provides a clearer picture of its core business.

Investments for Future Growth

Clorox is prioritizing profit margins over top-line growth. The latest quarterly results showed that Clorox has expanded its gross margins for nine consecutive quarters. For the entire fiscal year, the company forecasts organic sales growth of 3% to 5% while excluding the ERP transition impact. Clorox aims for a gross margin expansion of 125 to 150 basis points.

Furthermore, Clorox raised its adjusted earnings per share (EPS) guidance for the fiscal year, projecting a year-over-year increase of 16% at the midpoint. With a projected adjusted price-to-earnings ratio of 20.4 based on fiscal 2025 figures, the stock appears reasonably priced.

Advertising and sales efforts remain crucial for Clorox. The company is not merely cutting costs to improve margins. Instead, it aims to invest in its strongest brands to gain market share. For fiscal 2025, Clorox plans to allocate 15% to 16% of net sales to selling and administrative expenses, while dedicating 11% to 11.5% to advertising.

This strategy is critical because while Clorox may be expanding gross margins, it must also prove its capacity to maintain robust operating margins. The ERP investments focus on enhancing efficiency, but their effectiveness is yet to be fully determined.

Although revenue growth has stagnated post-pandemic, the recovery in gross margins is a positive sign. Operating margins, however, still trail behind pre-pandemic figures, with every percentage point impacting operating income by around $70 million.

Investment Perspective on Clorox

Investors considering Clorox now are betting on effective management strategy, particularly in streamlining operations and optimizing brand-related investments. By focusing on its top brands, Clorox is aiming for gross margin growth over mere sales increases, which could solidify its position in key market segments if executed well.

Additionally, the attractive 3.3% dividend yield makes Clorox a compelling option, especially as the company’s turnaround nears its completion in the coming years.

Clorox, Investment, Stock