Clorox (CLX -1.43%) stock had a small sell-off recently after the company hosted its Analyst Day on Oct. 2. And the stock is down about 10% from near-record highs in late July. Yet this consumer staples stock has not only outperformed the broader market over the past five years, it has also raised its dividend every year for decades, increasing its payout from $0.81 per share in 2000 to $3.94 in 2019.
As such, investors looking for a safe-haven stock that pays a consistent, rising dividend may look to pounce on Clorox shares right now. Potential investors need to ask: Is the recent swoon a legitimate concern or an opportunity opened up by a too-fearful market?
Lowering guidance worries investors
The culprit behind Clorox's recent fall isn't too difficult to ascertain. During its Analyst Day presentation, Clorox lowered its full-year fiscal 2020 guidance (ending in June) for both revenue and earnings per share. The company now expects revenue growth in a range of a low-single-digit decline to 1% growth, revised down from previous guidance of 0%-2% growth in fiscal 2020.
The lowered growth prospects will also hit profits, which were revised down to $6.05 to $6.25 in earnings per share (EPS) from previous guidance of $6.30 to $6.50 EPS. The new guidance represents a decline of 1%-4%, as opposed to a gain of flat to 3% EPS growth.
The new lowered guidance comes on the heels of an underwhelming fourth-quarter earnings report that the company gave back in August. To see Clorox bring down guidance so soon after another disappointment is disheartening. But there is a silver lining to be found. The new guidance revision was due to the best reason possible for Clorox investors.
Foreign currency blues
Clorox management isn't actually forecasting any deterioration in the company's operating metrics. In fact, the entire shortfall can be attributed to expectations around foreign currency -- specifically that of Argentina, where Clorox has a large presence. CFO Kevin Jacobson elaborated:
When we went into the year, we fully expected this to be a challenging year in Argentina. And we had assumed about a 25% devaluation of the currency. [In our] latest assumption, we now expect that devaluation to be closer to 50%. That generates the bulk of the update. I would say to a lesser degree, we do see the continued strength of the U.S. dollar. As the global recession fears continue, as the global trade dispute continues, we are seeing the safe haven status in the U.S. rise and it's strengthening against the basket of currencies where we do business. ... Importantly, no change [is seen] to our expectations on organic sales growth.
While International sales only made up about 20% of Clorox's revenue, the foreign currency change was severe enough to meaningfully change the company's full-year outlook. Fortunately, Clorox still sees organic growth, which strips out exchange rates, at 1%-3% for the next fiscal year, in line with prior guidance. Therefore, investors panicked by the latest guidance cut should breathe a sigh of relief, though they're not out of the woods just yet.
The IGNITE strategy
In an age where private-label brands have taken share as lower-cost alternatives, Clorox is really leaning away from competing on price. During the Analyst Day presentation, management presented its IGNITE strategy, the latest evolution of its premium strategy of the past few years. This includes raising prices while reinvesting the excess margin into innovation and promotion.
This strategy has worked for a number of Clorox's brands but has hurt others. For example, the company's Kingsford brand, which is a 100-year-old brand that's one of the company's "core" names, has been a problem recently.
During Analyst Day, Executive Vice President Eric Reynolds admitted the company had raised prices for the core charcoal customer but failed to realize that higher prices may make alternative barbecue fuels, such as pellets, more attractive. Clorox also failed to see the bigger interest in newer alternatives to charcoal, in general, and it is now behind the curve. The company is now pivoting to a more consistent price point for charcoal and unveiled a new premium pellet product without the fillers other companies use, according to Reynolds.
Environmental/social will be at the core of IGNITE
As part of the IGNITE premium strategy, management is making environmental, social, and corporate governance (ESG) values a central pillar. The company is targeting running all U.S. and Canadian operations on 100% renewable energy and targeting 100% compostable and recyclable packaging by 2025.
Putting its money where its mouth is, Clorox is even tying executive compensation to these ESG goals. This is all very commendable, but whether or not ESG will actually lead consumers to choose Clorox's brands over cheaper alternatives remains to be seen.
A murky way forward
While currency exchange headwinds were the proximate cause of the company's reduced guidance, more worrying are the headwinds in some core brands such as Kingsford and GLAD. Clearly, with retailers upping their game in terms of private-label offerings, Clorox has to do something to set itself apart.
CEO Benno Dorer's premium strategy is a perfectly valid course of action to differentiate Clorox from commoditized, low-cost alternatives. However, whether or not the strategy will yield strong growth from here is less clear. Retailer private labels aren't going away, and neither is the budget-conscious consumer -- especially if a recession hits. While management is doing a good job of targeting its premium segment, it's not entirely clear how big that segment is.
While Clorox's dividend growth is likely to continue and management has been a good steward of capital, Clorox's stock still isn't especially cheap right now with a price-to-earnings (P/E) ratio of 24 -- relatively expensive for a company that just forecast earnings declines for the upcoming year. As such, I'm not sure Clorox will bounce back in the near term, and we'll have to see if this premium strategy can work in the current age of stingy millennials.