What happened

Shares of Clorox (CLX 0.16%) tumbled 12.6% this week compared to where they closed last Friday, according to data from S&P Global Market Intelligence. As consumers view the COVID-19 pandemic as being more in the rearview mirror, the need to clean every surface with a disinfecting wipe is fading.

Clorox no longer needs the third-party contract manufacturers it brought in at the height of the COVID-19 frenzy when bleach, wipes, and disinfecting spray were in such demand you couldn't find them on store shelves. CEO Linda Rendle told investors, "We've been able to consolidate and narrow the external manufacturer portfolio we have to strategic partners."

Woman looking at bottle of bleach.

Image source: Getty Images.

So what

In Clorox's fiscal fourth quarter back in 2020 (ending in June), it reported that its health and wellness segment, which includes cleaning and professional products, had seen a 33% increase in sales and an 84% increase in pre-tax earnings. Segment revenue hit $805 million, or over 40% of total sales.

Last year that segment saw a 17% drop in sales and a 93% decline in adjusted pre-tax earnings. Health and wellness sales continued to fall in the first quarter, down another 3%, with adjusted pre-tax earnings falling 42% more from the year-ago period. Segment sales had fallen to $662 million and represented 36% of total revenue.

Now what

While Clorox stock was already exhibiting weakness because bleach and disinfecting wipes were no longer a priority for consumers, Walmart's earnings report rocked the stock further because the retail giant represents fully one-quarter of Clorox sales and its five largest customers represent half of all sales.

Rampant inflation is causing consumers to spend more to buy less, which is especially taxing on lower-income individuals. Walmart's results indicate consumers are moving their purchase decisions to lower-margin basics instead of higher-margin, discretionary goods.

While that should in theory benefit Clorox, the need to keep surfaces ultra clean and sterile is no longer seen as a priority. However, with new reports of monkeypox outbreaks, the concern level could rise again. If that happens, Clorox sales might just spike once more.