Clorox Shares Jump After Reporting Top and Bottom Line Beat

Before the opening bell Tuesday, Clorox (CLX) reported a top and bottom line beat with its fiscal second quarter results. Revenues of $1.4449 billion (-2% YoY) exceeded the consensus of $1.43 billion, and earnings per share of $1.46 (+4% YoY) exceeded the consensus of $1.35. Organic sales were flat in the quarter, topping downbeat street expectations of a -1.5% decline.

In the press release, Chair and CEO Benno Dorer said: "I feel good about the progress we're making, which is reflected in our second-quarter results, particularly the fifth consecutive quarter of gross margin expansion and sequential improvement in organic sales."

"We have confidence we're taking the right steps as we expect to return to growth in the back half of the fiscal year behind strong investments in our robust innovation plans to support distribution" he added. "Importantly, we remain committed to strong execution behind our IGNITE strategy to deliver long-term shareholder value."

The company will host its conference call at 1:30 p.m. ET today. You can join the webcast at the link here. We'll have more to say after the call, but in the interim we wanted to provide club members with the details from the release.

As mentioned in Mr. Dorer's comments, gross margin increased 40 basis points to 44.1% from 43.7% a year ago. Management attributed the margin expansion to the benefits of cost savings initiatives and price increases, which were partially offset by more promotion spending and manufacturing and logistics costs.

By segment, Cleaning (Laundry, Home Care, Professional Products) sales were flat YoY at $501 million against expectations of $498 million as pre-tax earnings increased 9% to $147 million. Organic sales growth was flat due to a 1% decline in price mix offset by a 2% increase in volume. Growth was led by Professional Products and Home Care but was offset by a decline in Laundry and an unfavorable mix from strong growth in non-tracked channels. Driving the pre-tax earnings growth was favorable commodity costs, cost savings initiative, and lower manufacturing and logistics costs.

Household (Bags and Wraps, Grilling, Cat Litter, Digestive Health) remained a point of pain as sales fell 8% YoY to $360 million, in-line with consensus expectations, and pre-tax earnings declined 20% to $37 million. Organic sales growth declined 8% due to a 3% decline in price mix combined with a 5% drop in volume. Bags and Wraps continued its struggles due to ongoing distribution losses in select portfolio and increased competitive activity. In Grilling, sales once again declined as solid consumption growth was more than offset by lower shipments related to elevated retail inventory levels. The decline in pre-tax earnings was mainly related to lower sales and higher manufacturing and logistics costs, with the benefit of cost savings offsetting some of the declines.

Lifestyle (Dressing and Sauces, Water Filtration, Natural Personal Care, Dietary Supplements) sales increased 4% YoY to $347 million compared to $348 million consensus, as pre-tax earnings increased 9% to $85 million primarily because of high sales. Organic sales increased 4% thanks to a 4% increase in volumes on flat price. Growth was led by Natural Personal Care, which was driven by innovation in Burt's Bees Lip Care and Face Care categories. Meanwhile, Food and Water Filtration delivered sales growth thanks to higher merchandising support for hidden Valley products and Brita Innovation.

International (outside the U.S.) sales fell 2% YoY on a reported basis to $241 million compared to $234 million expectations as pre-tax earnings grew 24% to $31 million. Organic sales growth was +6% thanks to a 7% improvement in price mix, offset by a 1% decline in volume. At -8%, the impact of foreign exchange, primarily from Argentina, was a big headwind to the reported results. But pre-tax earnings were up thanks to price increases and cost savings, which more than offset inflationary pressure on manufacturing and logistics costs and also foreign exchange.

Turning to the fiscal 2020 outlook, management's sales expectation is unchanged at a low single digit decrease to one percent increase, however this incorporates a "slightly more favorable" impact from foreign exchange, offset by more promotional spending to address competitive activity in select categories. Also, management lowered its organic sales growth and is now expected to be flat to +2% compared to previous guidance of a 1% to 3% increase. We'll look for more color on this during the conference call.

On a more positive note, gross margins are expected to be "up slightly" compared to previous guidance of "down slightly", largely due to lower input costs. But as mentioned, advertising and sales promotion spending is now expected to be "slightly more than 10% of sales" compared to "about 10% of sales" due to investment in "robust innovation platforms in the back half of the fiscal year in order to support distribution." Management continues to expect selling and administrative expenses to be about 14% of sales and an effective tax rate in the range of 22% to 23%, all leading to a new fiscal 2020 diluted EPS between $6.10 and $6.25, up 5 cents at the low end and compares favorably to consensus of $6.14.

In reaction to the release, CLX shares are rallying roughly 5% at the time this was written. We think there are a few things going on here. First, expectations were quite low into the print from both the sell-side and buy-side because of all the past disappointments the company had recently reported. But as we saw in the results, organic sales growth came in flat in the quarter and topped estimates of a 1.5% decline. These numbers may be muted compared to fast-growing peers, but a better than expected result is a positive.

Also, we like how management was able to upwardly revise its EPS guidance despite their call to increase promotional activity. We think investors have been on the Clorox sidelines due to worries that EPS was at risk because of all the reinvestment/promotional activity the company must undergo to regain market share in select struggling categories. However, this quarter's results show that the company is able to absorb such hits because of lower input costs (evidenced by margin expansion) and less of a headwind from foreign currency. And if management's investment leads to market share gains, then the path towards the return of organic sales growth will be clearer.

Again, the conference call will be held at 1:30 pm ET and we will look for more color around updated guidance, the potential sales lift in wipes related to the coronavirus, and more evidence of greenshot activity in Bags and Charcoal. Hard to buy any stock up this much before a conference call, but we continue to like the long term story here.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long CLX.