Clorox (CLX -0.86%) has experienced a significant decline of 10.1% year-to-date at the time of writing, with much of this downturn occurring last week following the company’s release of second-quarter fiscal 2025 results. Renowned for its products such as bleach, Kingsford charcoal, Hidden Valley Ranch, and Burt’s Bees, Clorox has navigated a tumultuous market landscape in recent years. However, signs indicate that the conclusion of its turnaround efforts may finally be within reach.
Offering a 3.3% dividend yield and boasting 40 consecutive years of dividend increases, Clorox presents a lucrative opportunity for passive income seekers. However, this potential hinges on the company’s ability to enhance its underlying business fundamentals. In this context, the recent stock market sell-off could represent a strategic buying opportunity for long-term investors who are optimistic about Clorox’s future trajectory.
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Understanding Clorox’s Path to Recovery
In the past five years, Clorox’s earnings have fluctuated due to both external market factors and internal decisions. The COVID-19 pandemic initially created a surge in demand for household cleaning products, benefiting Clorox immensely. However, as the company miscalculated ongoing demand trends, it found itself increasingly vulnerable to supply chain disruptions and inflationary pressures. This volatility has made it challenging to maintain stable earnings, leading to a series of adjustments within the company.
In August 2021, as part of its recovery strategy, Clorox unveiled an ambitious five-year plan aimed at overhauling its enterprise resource planning (ERP) system, transitioning to a cloud-based platform, and investing in a suite of digital technologies. The primary objective is to modernize Clorox’s internal operations, including critical areas like supply chain management, finance, and data analytics, thereby enhancing overall efficiency. The projected investment for this initiative has escalated to approximately $560 million to $580 million, underscoring the company’s commitment to long-term operational improvements.
In the fourth quarter of fiscal 2023, Clorox recorded a noncash impairment charge of $445 million in its Vitamins, Minerals, and Supplements division, a strategic move aimed at streamlining its portfolio to concentrate on core brands. Moreover, in fiscal 2024, the company faced a one-time noncash pension settlement charge of $171 million. Additionally, Clorox dealt with the repercussions of a costly cyberattack, which significantly impacted its financial performance in both fiscal 2023 and fiscal 2024. Furthermore, in March 2024, the company made the strategic decision to divest its operations in Argentina, Uruguay, and Paraguay.
Clearly, Clorox has faced unprecedented challenges since the onset of the pandemic. To more accurately assess the company’s performance, it’s crucial to consider its adjusted earnings, which provide a clearer picture of the core business’s health by excluding one-time charges and the financial impacts of the ERP investment.
Strategic Investments for Sustainable Growth
Clorox is currently prioritizing improvements in profit margins over mere revenue growth. In the most recent quarter, Q2 fiscal 2025, the company achieved its ninth consecutive quarter of gross margin expansion. Clorox is guiding for an organic sales growth of 3% to 5% for the full fiscal year, excluding the effects of the ERP transition. The company also anticipates an expansion in gross margins of 125 to 150 basis points for the fiscal year.
The company has raised its adjusted earnings per share guidance for the fiscal year to a new range of $6.95 to $7.35, reflecting a year-over-year increase of approximately 16% at the midpoint. Based on projected results for fiscal 2025, which ends June 30, Clorox would exhibit a 20.4 adjusted price-to-earnings ratio with a share price of $145.95 at the time of this writing.
While Clorox is focusing on profitability, it recognizes that advertising and sales are pivotal components of its overall strategy. This means that the company is not merely implementing extensive cost-cutting measures to enhance margins. Instead, Clorox is committed to investing in its most profitable brands, believing that strategic spending will ultimately yield greater returns. For fiscal 2025, the company estimates that selling and administrative expenses will constitute 15% to 16% of net sales, while advertising and promotional expenses are projected to be 11% to 11.5%.
The significant investment in sales, general, and administrative (SG&A) expenses is noteworthy as it directly influences operating margins rather than gross margins. Thus, while Clorox is successfully expanding its gross margins, it is essential for the company to demonstrate its ability to sustain robust operating margins. The ERP investments are intended to enhance operational efficiency, but the effectiveness of this spending remains to be seen.
The accompanying chart illustrates that Clorox’s revenue growth has plateaued since its pandemic-driven surge, although gross margins have rebounded. Nevertheless, operating margins continue to lag a few percentage points behind pre-pandemic levels, indicating that further improvements are necessary for overall financial health.
CLX Revenue (TTM) data by YCharts. TTM = trailing 12 months.
A slight difference in operating margins can significantly impact a company’s profitability, transforming a good company into a great one. For Clorox, each percentage point change in operating margin represents approximately $70 million in operating income. Therefore, while Clorox’s turnaround efforts appear to be progressing positively, it remains critical for the company to deliver results that validate its divestitures, long-term investments, and SG&A expenditures.
Why Clorox is a Smart Investment Choice for Growth-Oriented Investors
Investing in Clorox at this juncture represents a strategic bet on the management’s ability to successfully restructure the business through optimized internal processes and strategic allocation of advertising resources focused on core brands. By reinforcing investment in its leading brands, Clorox is aiming for enhanced gross margin expansion rather than simply chasing revenue growth. If executed effectively, this strategy could enable the company to capture additional market share in key product categories.
The attractive 3.3% dividend yield further enhances the appeal of owning Clorox stock, especially as the company’s turnaround initiatives are expected to reach fruition within the next year or two. For investors, this combination of potential capital appreciation and passive income makes Clorox a noteworthy contender in their investment portfolio.