The Clorox Company

Moat: 2/5

Understandability: 1/5

Balance Sheet Health: 4/5

The Clorox Company is a leading multinational manufacturer and marketer of consumer and professional products, well-known for its cleaning and disinfecting brands like Clorox and Glad.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

The Clorox Company is a global powerhouse in household and professional consumer goods, boasting a wide array of well-known brands spanning across cleaning, lifestyle, and health and wellness. In fiscal year 2023, the company reported net sales of $7.1 billion. Operating segments are broadly categorized as:

  • Health and Wellness: This segment focuses on cleaning products, primarily disinfectants and sanitizers, under the Clorox, Pine-Sol, and CloroxPro brands. It represents the biggest sales for the company.
  • Household: This segment includes trash bags and food storage products under the Glad brand and charcoal under Kingsford brand.
  • Lifestyle: This includes premium brands such as Brita and Burt’s Bees. It makes up the smallest portion of revenue.
  • International: This segment serves as the global arm of the Company, providing similar products as the above segments in different countries.

The company has a strong presence both in the U.S. and internationally, with a wide range of distribution channels, including retail stores, e-commerce, and professional distribution networks.

Industry and Competitive Landscape

The consumer goods industry is characterized by intense competition, with frequent price wars and innovation cycles. To have a clear understanding, you need to analyze the competitive landscape by segment:

  • Health and Wellness: Intense competition, highly impacted by government regulation and rapidly changing consumer preferences.
  • Household: Competitive environment with several low-cost alternatives and commoditization.
  • Lifestyle: Highly dependent on brand awareness and marketing.
  • International: Highly dependent on local government relations and regional preferences. Major competitors include companies like Proctor & Gamble, Unilever, Reckitt Benckiser, SC Johnson and Colgate-Palmolive. Clorox differentiates itself through a combination of its strong brands, broad portfolio, commitment to sustainability and innovation, and a focus on customer relationships. These are the core values that CLX believes makes them different from their peers.

Financial Performance

The company’s financial health seems solid, with good historical financials, but they were recently affected by economic turbulence and rising costs.

  • Revenues: The company has shown some organic growth struggles in 2023, where the company faced a decline in sales in the last 2 quarters.
    • However, sales growth is expected to pick up again in 2024 and beyond.
  • Margins:
  • Gross profit margin is roughly 39% in their latest quarter, and this is up a few percent from the previous quarter which shows signs of recovery
  • operating margins have increased to 15.5% this year due to increased cost cuts and streamlining of the businesses
  • Profitability: In the last 10 years Clorox had higher returns on invested capital, which has since come down as competition and commodity costs have increased.
  • Capital Structure: Company maintains high levels of liquidity, as a means of withstanding any downturns or economic shocks. Clorox uses leverage to boost returns, but also uses it to finance growth strategies.

The company has faced a lot of headwinds lately. Some of the headwinds include high inflation and rising interest rates and changing consumers preferences, specifically demand for greener products. These economic factors and the effects they have on consumers are proving to be a major obstacle for the company.

Moat Analysis

Moat Rating: 2 / 5

Clorox possesses a limited moat. While its brands and distribution network are strong, the company’s reliance on commodity inputs, and high dependence on advertising could limit its competitiveness and profitability long term.

  • Intangible Assets: Its brand names like Clorox and Glad have pricing power and can improve customer stickiness, but the company does not consistently command high premiums compared to cheaper, generic products. However, there is still some preference for these brands, making it a weak moat.
  • Customer Switching Costs: There are negligible switching costs for consumers, as there is no large cost involved in changing to another brand of bleach, trash bag, or food wrap. There may be brand loyalty, however, which could make up a weak moat.
  • Network Effects: There are no noticeable network effects that would significantly help the business.
  • Cost Advantages: The company has not shown any significant cost advantage, particularly as supply chains become diversified and globalized. Also the cost of production for goods like bleach and other similar chemicals is not as capital intensive, and hence has more competitors.

Overall, the moat is considered narrow and weak due to relatively low stickiness and little barriers to competition.

Moat Risks & Business Resilience

  • Legitimate risks to the moat:
    • Commodity price volatility: Clorox’s margins are susceptible to fluctuations in commodity prices, especially for chlorine and raw materials for its products. This is a significant risk that they are trying to mitigate by sourcing cheaper substitutes.
    • Changing consumer preferences: There is increasing demand for greener products. Failure to adapt and provide products that comply with evolving environmental preferences could lead to customers switching away.
    • Competition: Competitors are able to easily mimic Clorox’s current products and have an easier time entering the market. Therefore, the company must constantly innovate in order to stay competitive.
  • Business Resilience:
  • The company has a diversified portfolio in the household, health and wellness, and lifestyle areas, therefore its revenue is not wholly dependent on one business segment.
  • Also, many of its products are used for cleaning and sterilization, whose demand usually remains stable during all economic conditions. So it will do better in downturns compared to other companies.
  • The brand name is known and trusted among most households and this brand recognition helps keep consumer loyalty relatively high.

The company’s ability to maintain profitability over a long duration is questionable. They face increasing competition from competitors and they are reliant on brands and advertising, which do not ensure they will have a solid financial position long term.

Understandability

Understandability: 1 / 5 The business is incredibly easy to understand, involving well-known household and consumer products. There is no complex technology or convoluted financial structure that an investor needs to understand to assess the business.

Balance Sheet Health

Balance Sheet Health: 4 / 5

  • Liquidity: The company has a healthy cash balance that is sufficient enough to sustain operations in any downturn.
  • Debt: There is high amount of debt, but they have consistently reduced debt over the past few years.
  • Financial Strength: the company’s finances are stable and can cover current liabilities.

Despite high levels of debt, Clorox’s management and financial position allows it to manage its debt and also have enough dry powder to expand its businesses.

Additional Insights and Management Outlook

  • Recent Concerns/Controversies: Clorox, along with many other companies, are having trouble coping with the higher costs. Clorox has been particularly affected due to heavy reliance on commodity products. Although, they are implementing cost reduction and cost streamlining methods. The management also mentions that they have seen the impact of these methods on increased profits.
  • Management Outlook:
    • Management has laid out a new path forward focused on investing in its brands, digital capabilities and operational excellence, that will help grow profits into the future. They believe that these plans will provide solid and sustainable value creation to the shareholders.

By focusing on these key principles like increasing the ROIC and free cash flow, while maintaining a strong balance sheet, they believe the company is in good hands.