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Clorox Is Raising Prices to Combat Inflation

By Parkev Tatevosian, CFA – Nov 5, 2021 at 10:30AM

Key Points

  • Clorox will raise prices in a broader assortment of products than it initially planned.
  • So far, consumers are absorbing prices increases without significantly reducing purchases.
  • Clorox stock was up by 1% in the day following the report.

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Rising costs led the gross profit margin to fall significantly at Clorox.

Clorox (CLX -2.13%) reported fiscal 2021 first-quarter earnings on Nov. 1 -- to shareholders' delight. The company said demand for its products was better than expected in the quarter, driven by the surge of the delta variant. 

That isn't to say all was well in the report. Management also noted that the cost of inputs and transporting its products increased faster than they thought. As a result, the company will be raising prices on its products to help offset the impact. 

A person cleaning a counter.

Clorox stock is trading at a price-to-earnings ratio near its decade high. Image source: Getty Images.

A better-than-expected start in fiscal 2022

Demand for Clorox's products surged at the onset of the pandemic. Its host of cleaning and disinfecting items were frequently sold out as the coronavirus pandemic led people and businesses to clean surfaces more regularly. In the quarters ended in March, June, September, and December 2020, revenue increased by 15%, 22%, 27%, and 27%, respectively, from the same quarter of the prior year. To put those figures into context, this company had not grown revenue more than 5% in any year in the past decade before 2020.

Therefore, it's no surprise that for fiscal 2022 management is forecasting a decrease in revenue from the elevated sales caused by the pandemic. As more folks are getting vaccinated and the threat of COVID-19 is receding, people and businesses are getting less interested in cleaning products. In Clorox's first quarter of fiscal 2022, sales decreased by 6% from the same quarter last year, which was actually better than expected. Meanwhile, its gross profit margin decreased by a whopping 1,090 basis points, to 37% from 48% last year.

Here's CEO Linda Rendle on Clorox's plan to offset increasing costs: "We're on track to implement price increases on 50% of our portfolio, most of which will take effect in November. We're also planning additional pricing actions through the end of fiscal '22, resulting in increases to about 70% of our portfolio."

So far, so good. The company said that consumers are not reacting to price increases too negatively. Typically, when a company increases prices, consumers purchase fewer units. Management looks at how its customers have responded to price increases and uses the information to calculate the optimum level. Clorox said that customer response to its latest price increases is better than expected, which is an excellent sign for shareholders. It could mean higher profits in the long run if the rise in expenses proves temporary.

The stock is expensive by historical standards

Clorox's demonstration of improving pricing power could be one reason the stock was up by 1% in the day following its earnings release. Otherwise, a 1,090-basis point drop in gross margin could have reasonably caused a sell-off.

At the moment, Clorox stock still looks expensive, trading at a price-to-earnings ratio of 30. That's nearly the highest it has sold for a decade. As such, investors should wait and see how all these product price increases will affect Clorox's sales and profits before buying shares at these lofty levels.

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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