Have any of the following products been important in your life? Laundry detergent, toothpaste, home pregnancy tests, deodorant, or condoms. Unless you enjoy dirty clothes, body odor, bad breath, and risking your health, the answer is most likely yes. Church & Dwight (CHD -0.28%) manufactures and sells such products. With its recent acquisition of Avid Health, it's now the leader in gummy vitamins and supplements as well.
Recent results
In the second quarter, net sales increased 13.1% to $787.6 million year over year. The acquisition of Avid Health played a big role, but organic sales still improved 1.8%. Volume also spiked 2.7%.
One of the few negatives for the quarter was a product mix pricing impact decline of 0.9%. In other words, lower-priced items are seeing more demand than higher-priced items.
Marketing expenses increased to 13.2% of sales versus 12.7% of sales in the year-ago quarter. Some people might look at this as a negative, but Church & Dwight aimed to increase marketing for its new products as well as its power brands. This is also why you shouldn't be concerned about the $14.6 million increase in SG&A expenses. These increases are necessary in order to grow, and Church & Dwight manages its balance sheet well. This is evidenced by its current debt-to-equity ratio of just 0.30, better than the industry average of 0.60.
Quick segment breakdown
Church & Dwight operates in three segments: consumer domestic, consumer international, and specialty products. Consumer domestic is by far the most important. Therefore, we'll begin there.
Consumer direct net sales shot up 17.4% to $594.5 million year over year. This can be attributed to the acquisition of Avid Health, strength in Arm & Hammer liquid laundry detergent, Oxiclean laundry additives, Trojan condoms and lubricants, and First Response diagnostic tests.
Consumer international net sales improved 9.4% to $132.7 million, thanks to higher sales volumes in Canada, U.K., and Australia; as well as higher U.S. exports.
Specialty products net sales dropped 12% to $60.4 million due to lower volumes and pricing on certain items. Additionally, unfavorable weather affected dairy demand, and Brazil's economy looks to have slowed due to political turmoil.
Overall, it was a good quarter. While past results often indicate management strength or weakness, investors always want to know what's ahead.
Forward-looking
Church & Dwight's strategy going forward is simple, and when it comes to investing, simplicity is bliss. Church & Dwight aims to drive the top line through innovation while also improving the bottom line via cost-cutting measures. If you're concerned about the company's potential to accomplish these goals, consider its track record on the top and bottom lines over the past five years.
Top-line performance:
CHD Revenue TTM data by YCharts
Bottom-line performance:
CHD EPS Diluted TTM data by YCharts
Church & Dwight expects fiscal year 2013 earnings per share of $2.79, which would represent a 14% improvement over FY 2012. Net sales are expected to grow in the double digits, organic sales should increase 2%, and gross margin is likely to improve by 50-75 bps.
Church & Dwight does expect an unfavorable product mix and pricing pressure to continue, but these headwinds should be offset by strong volume and cost-cutting measures.
Church & Dwight vs. peers
You might have noticed in the charts above that Church & Dwight has outperformed its peers Clorox (CLX 0.60%) and Procter & Gamble (PG 0.86%) on both the top and bottom lines over the past five years.
Clorox does have an edge over Church & Dwight in certain areas, especially a favorable product mix and pricing power. Like Church & Dwight, Clorox is intently focused on cost management, and gross margin is expected to expand. However, Clorox saw lower volumes (3%) in its most recent quarter.
Also like Church & Dwight, Clorox expects its sales and earnings per share to improve for the year. For FY 2014, Clorox guided for sales to improve 2%-4%, and EPS to come in at $4.55-$4.70. Even if EPS comes in on the low end, it would be an improvement over last year when Clorox delivered $4.30.
In a way, the Clorox story is the opposite of Church & Dwight. While Church & Dwight is seeing better volumes and pricing pressure, Clorox is seeing lower volumes and improved pricing. Both companies' managements are strategizing accordingly, and both companies are likely to remain long-term winners.
Procter & Gamble is seeing higher volumes while also focusing on cost-cutting measures. The consistent buybacks don't hurt, either. While innovation and marketing have led to higher volumes, the company must contend with an unfavorable product mix. However, Procter & Gamble saw net sales improve 2% to $20.7 billion last quarter. Procter & Gamble is also cutting costs as if its diapers are on fire. Procter & Gamble is also now more focused on its core brands and profitable operations. Thanks to the company's aforementioned strategies, international expansion, household-name brands, and marketing power, Procter & Gamble remains a top-tier long-term investment.
The bottom line
All three aforementioned companies are winners. You won't find many safer long-term investments. However, if you're looking for the most growth potential without sacrificing bottom-line potential, then you should strongly consider Church & Dwight.
