Household-goods manufacturer The Clorox Company (NYSE:CLX) released fiscal second-quarter 2019 earnings on Monday before markets opened. The company's year-over-year top-line advance of nearly 4% may seem middling to the uninitiated, yet it counts as fairly robust growth in the current environment for consumer-goods multinationals. Management apparently also pleased shareholders by reaffirming Clorox's previously issued fiscal-year earnings guidance
In the discussion that follows, note that all comparative numbers are presented against the prior-year quarter (the fiscal second quarter of 2018).
Clorox: The raw numbers
|Metric||Q2 2019||Q2 2018||Growth (YOY)|
|Revenue||$1.47 billion||$1.42 billion||3.5%|
|Net income||$182 million||$233 million||(21.9%)|
|Diluted earnings per share||$1.40||$1.77||(20.9%)|
What happened this quarter?
Clorox enjoyed a 4% revenue benefit from its April 2018 acquisition of nutritional supplements manufacturer Nutranext, which was offset by a currency headwind of 3%, implying 2.5 percentage points of organic revenue growth during the quarter.
Cleaning segment revenue increased 6% to $500 million, which management attributed to innovation in home-care brands, such as the Clorox Scentiva product family, and double-digit growth in the segment's professional products division.
Household segment sales dipped 4% to $393 million, as competitive activity dampened sales of bags and wraps, and charcoal sales decreased due to a shift in the timing of shipments and lower consumption. Management observed that innovation in cat-litter products partially offset the revenue deceleration.
Acquired revenue from the Nutranext purchase, growth in Burt's Bees personal care products, and a double-digit sales improvement in Hidden Valley dry dressings combined to advance the lifestyle segment's top line by 25% to $335 million.
International revenue dropped 8% to $245 million, as price increases could not overcome a 16% foreign currency headwind.
Clorox's management attributed much of the quarter's organic revenue growth to price increases which the company began rolling out last year. In addition to selective international pricing actions, recent sticker adjustments have focused on Burt's Bees and the Kingsford charcoal product lines.
Clorox's gross margin improved by roughly 70 basis points to 43.6%. The beneficial effects of firmer pricing and an ongoing cost-saving program were somewhat absorbed by higher manufacturing, transportation, and commodity costs.
The difference in net income between the current quarter and the comparable prior-year period stems almost entirely from a one-time tax benefit recorded in the second fiscal quarter of 2018.
While the prior-year quarter's tax benefit produced an unfavorable comparison, in general, a lower tax rate has resulted in lower cash paid for taxes, boosting Clorox's cash flow in recent quarters. In the first two quarters of fiscal 2019, the company has improved operating cash flow by nearly 39% to $449 million, while free cash flow has increased by 12% to $363 million.
What management had to say
In Clorox's earnings press release, CEO Benno Dorer reviewed factors behind the quarter's performance, and signaled that marketing investments in the second half of the fiscal year will be utilized to support revenue expansion:
Sound execution of our pricing and cost-savings plans has enabled us to address near-term headwinds, resulting in another strong quarter of topline performance. Importantly, we remain on track for sales and earnings in fiscal year 2019. With pricing largely behind us, we're focused on ongoing investment in our brands through robust back-half innovation, behind significant advertising and sales promotion support. We have continued confidence in our ability to deliver long-term value for our shareholders, guided by our 2020 Strategy [profitable growth coupled with total shareholder return], with an emphasis on innovation, brands with purpose and superior value, and leadership in digital.
Clorox didn't back off its existing projections of relatively healthy growth for 2019, a primary reason shares were up as much as 6% in the trading session following the company's earnings release.
For the fiscal year, the organization still anticipates 2% to 4% revenue growth, as 3 percentage points of organic growth from innovation and 3 percentage points of acquired revenue via Nutranext are projected to overcome 3 percentage points of negative impact from foreign currency exchange.
Clorox remains confident that gross margin will remain flat over the course of the year: Management believes that pricing and cost-cutting will fully absorb higher commodity costs and impacts from tariffs.
Finally, diluted earnings per share (EPS) are projected to land between $6.20 and $6.40 in fiscal 2019. If current momentum holds and Clorox hits the top of this range, the organization will book a modest advance over last year's diluted EPS of $6.26.