Clorox (CLX -0.69%) is a well-known and respected consumer staples company. Since the stock hit a peak in 2020, the company has suffered through a series of unfortunate events. That's left the stock price down 40% or so from its high-water mark and pushed the dividend yield up to 3.4%.
If the fear of a bear market has you feeling blue, Clorox has already been through the Wall Street ringer and, therefore, might be of interest.
What went right and then wrong at Clorox
Clorox's namesake product is closely tied to cleaning. It also sells other brands in the cleaning space that you probably know well, like Pine-Sol and Mistolin, among others. Demand for cleaning products skyrocketed during the coronavirus pandemic as people attempted to slow the spread of the illness by augmenting their cleaning regimes. That was good news for Clorox, but the company didn't have enough production. That required it to hire contract manufacturers to ensure that store shelves remained full.
Image source: Getty Images.
Fast-forward to the post-pandemic world and demand for cleaning products fell sharply. At the same time inflation and supply chain distributions caused material problems, resulting in a significant increase in operating costs. Having ramped up to meet demand during the pandemic, Clorox's margins got crushed and investors sold the stock. Management was quick to take action, laying out a plan for regaining margin. It wasn't a fancy plan, calling mostly for cost-cutting and price increases, but management promised to get the company back on track. And it did for a while.
There was some low-hanging fruit, like getting rid of the contract manufacturers. And the success wasn't short-lived. Gross margin has improved year over year in each of the last four fiscal quarters. Basically, the company has been doing what it said it would do. That's something investors should appreciate.
But that good news was vastly overshadowed by a new piece of bad news. The company was hit by a cybersecurity event that necessitated returning to, for lack of a better description, pad and paper. The business was notably disrupted and investors were less than pleased. The stock remains mired in its own personal bear market despite the generally solid execution in the difficult post-pandemic hit.
What's going wrong today?
While higher year over year, the consumer staples giant's gross margin fell sequentially from 42.7% to 38.4% between the fiscal fourth quarter of 2023 and the fiscal first quarter of 2024. According to the company, that was largely related to improvements from price increases and cost-cutting being offset by a volume decline. The volume decline was directly caused by having to manually track orders and shipments because of the cyberattack.
Clorox is working through the cyber issues it is facing and, according to management's comments during the fiscal first-quarter 2024 earnings call, the company has contained the attack, restored its digital functionality, and is now focused on regaining any market share that it lost. The company hasn't provided any hard guidance on when it will be back to normal functioning, but it sees a clear path forward. So, in time, this too shall pass.
The bear market has already happened for Clorox
The big picture is that long-term-investors have been given more time to buy Clorox with a historically high yield. Note that the dividend has been increased annually for 46 consecutive years, including through the post-pandemic weak spot. The annualized dividend increase over the past decade was a solid 6%. If you are a dividend growth investor, this stock could be a great addition to your portfolio today.
But the real attraction if you are worried about a bear market is that Clorox has already suffered its own dramatic downturn. That suggests that a broad market sell-off won't have the same negative impact since short-term investors have likely already dumped their Clorox shares. This is a contrarian view, but management's ability to live up to its promises even during difficult times suggests the potential upside probably outweighs the downside risks right now.
