It's no surprise to hear that high commodity prices are starting to bite into corporate profits. After all, when you depend upon chemicals, resins, and the like, but you can't really raise the prices of your finished products, you've got a problem. Accordingly, Clorox (NYSE:CLX) posted disappointing results for the third quarter, which ended in March.
Total sales were up about 3% for the period on the basis of a similar increase in sales volume. While sales in Latin America were once again quite strong, and sales of home care, litter, and Glad products were good, there was weakness in more-seasonal product categories like charcoal, auto care, and salad dressings.
Gross margin was a bit ugly. It fell by 260 basis points as the aforementioned commodity costs took their bite. Good cost control, particularly on the selling and administrative expense line, recouped much of this, and operating margin for the third quarter actually ticked up a little over last year. On a net basis, though, profits were down more than 6%.
Not surprisingly, cash flow was also affected. Operating cash flow for the quarter dropped significantly ($58 million vs. $203 million), and as a result, year-to-date operating cash flow is lagging the year-ago level.
Clorox isn't exactly a scintillating company or stock, but overall, it's done pretty well over the past 10 years. What's more, it now trades at a discount to its industry and competitors like Colgate-Palmolive (NYSE:CL) and Procter & Gamble (NYSE:PG), though it should be noted that it's a much smaller company.
The company faces some challenges, like recovering from these high commodity costs and dealing with increasingly powerful retailers like Wal-Mart (NYSE:WMT), but the company has at least a few things going for it. The company's brands are well-known (who doesn't have a Clorox product in their house?), the business generally generates good cash flow, and management has a good track record of sharing cash with shareholders.
Given that the company still has a double-digit return on assets, decent margins, and a reasonable valuation, it's not a terrible candidate for investors looking to add a somewhat defensive name. While this quarter's underperformance may lead some to question its status as a "defensive stock," I'd argue that this quarter was more of a hiccup than a train wreck.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
