Clorox (CLX 0.28%) thrived at the onset of the pandemic when folks were suddenly spending a lot more time at home. That created a surge in demand for the company's products, primarily used at home.
Now that economies are reopening and people are leaving their houses more often, sales are declining. On top of that headwind, Clorox is grappling with inflationary pressure that hurts profit margins.
When Clorox reports fiscal 2022 second-quarter earnings on Feb. 3, investors will want to hear more details on how effectively management is implementing price increases to offset inflation on inputs.
Sales are declining for Clorox as economies reopen. Image source: Getty Images.
Inflation is hitting profit margins at Clorox
In its most recent quarter ended Sept. 30, Clorox reported a 6% decline in sales from the year-ago period. However, that was to be expected considering that sales increased 27% in last year's Q2. Clorox has increased revenue at a compound annual rate of 3.4% over the previous decade, so an increase of 27% is far above the trend. Of course, the boost was attributed to the effects of the coronavirus pandemic. Folks were staying home more often, and cooking and cleaning more than usual.
At first, the pandemic provided a tailwind for Clorox, increasing sales and profit. Now, the pandemic is becoming a headwind. Economies are reopening, and folks are spending less time at home. Meanwhile, infections at manufacturing plants and logistical facilities reduce the output of goods and make it more expensive to transport them to where they are in demand. As a result, sales are decreasing and expenses are rising for Clorox. CEO Linda Rendle stated:
We're off to a solid start in fiscal year 2022 and saw stronger-than-anticipated demand across our portfolio, despite a challenging operating environment. We made meaningful progress on restoring supply -- which contributed to holding or gaining market share in the vast majority of our businesses -- and we're pulling multiple levers to manage through this inflationary period. This includes pricing actions and stepping up our cost reduction initiatives, which will help us rebuild margins and create fuel to reinvest in the business.
Although the environment remains volatile and we expect cost pressures to persist, our first-quarter performance, coupled with the actions we're taking, put us on track to meet our fiscal 2022 outlook. Importantly, we also remain focused on delivering against our strategic priorities to create long-term value for our stakeholders.
Price increases will be meaningful. Rising commodity prices and logistics expenses in its most recent quarter harmed gross profit margins by 1,020 basis points. That's a significant move for a company that's sustained gross profit margins in the narrow range of 42.1% to 45.6% in the past decade. The inflationary headwind brought Clorox's gross profit margin down to 37.1% in Q1.
What this could mean for Clorox investors
Analysts on Wall Street expect Clorox to report revenue of $1.66 billion in Q2 and earnings per share of $0.84. If it meets those projections, that would represent decreases of 9.8% and 58.6%, respectively, from the same period last year.
Interestingly, despite the negative near-term prospects, Clorox's stock is up 8.36% in the past three months while the rest of the market has struggled. Investors' appetite is moving away from high-growth speculative stocks and toward more defensive names like Clorox. If management can tame the harmful effects of inflation, it could keep the momentum going for the company in the near term.
