Word to the Foolish: Tomorrow's the day that Clorox (NYSE:CLX) releases its earnings news for fiscal Q2 2006. Before you pick up the release, I suggest you don some gloves.

Wall Street Wisdom:

  • General consensus. A lucky 13 analysts track Clorox's fortunes. Seven of them sit the fence, and the rest are split evenly between "buy" and "sell" ratings.
  • Revenues. Whoever got the job of calculating the revenue growth this quarter needs to send Clorox a thank-you note. The company made $1 billion in sales a year ago and is expected to report $1.03 billion tomorrow.
  • Earnings. Profits are another story, however. They're believed to have slumped by 35% in comparison with the year-ago quarter, down to $0.47 per share.

Margin watch:
Making your whites whiter is an often thankless job. (Thanks, Mom.) Over the past year, it's become an increasingly less profitable one as well. Over the past four quarters, Clorox's rolling margin results have fallen consecutively in the gross, operating, and net categories.

Margins %

6/04

9/04

12/04

3/05

6/05

9/05

Gross

44.3

44.6

45.1

44.4

43.6

43.2

Op.

19.6

19.7

21.3

21.0

19.4

18.7

Net

13.2

12.9

25.5

25.1

25.0

24.3

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish forensics:
Absent any exorbitant charges to earnings, it appears this is a simple case of raw-material costs rising more quickly than Clorox can pass them on to customers. The past two quarters have served up sales growth of 6% and 5% year over year, respectively. Meanwhile, Clorox's cost of goods sold rose 9% and 8%, respectively. That disparity caused a decrease in gross profit, and the effects spilled downward onto operating and net profits.

Foolish lookout:
With Clorox's problem identified, it's easy to pick out what we need to look for tomorrow. Two months ago, Clorox CEO Jerry Johnston admitted that the company's real issue is the "challenging cost environment." He promised to overcome it through a combination of increasing prices on Clorox's goods and reducing operating costs. All we need do, then, is look for evidence that he's marrying actions to words.

Competitors:
Clorox's primary competition comes from privately held S.C. Johnson and public companies Colgate-Palmolive (NYSE:CL) and Procter & Gamble (NYSE:PG).

Colgate-Palmolive is a recommendation ofMotley Fool Inside Value. Want to brush up on the market's best undervalued stocks? Take the Inside Value newsletter service for a free, 30-day spin.

Fool contributor Rich Smith does not own shares of any company named above.