Clorox’s Fiscal 2Q16 Gross Margin: Highest in More than Five Years



Gross margin increase

The Clorox Company (CLX), or Clorox, reported a slight improvement in gross margin in fiscal 2Q16. Notably, the company’s gross profit margin increased by 210 basis points—to 44.6% from 42.5%—in 2Q15. This increase was driven by benefits of favorable commodity costs, cost savings, and price increases, but it was partially offset by higher manufacturing and logistics costs. According to Clorox CEO Steve Robb, this was the highest quarterly gross margin the company has delivered in more than five years.

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Operating margin versus peers

The company’s operating margin increased to 18.5% in fiscal 2Q16, compared to 16.4% in fiscal 2Q15. The increase was primarily due to strong sales growth across its Cleaning, Household, and Lifestyle segments, driven specifically by Glad, Ranch, Burt’s Bees, and Splash-Less bleach.

Similarly, Procter & Gamble’s (PG) operating margin in fiscal 2Q16 increased to 22.8% compared to 19.4% in fiscal 2Q15, due to productivity savings. Kimberly-Clark’s (KMB) adjusted operating margin also improved by 120 basis points, including benefits from $365 million of FORCE cost savings in calendar 4Q15. Church & Dwight’s (CHD) operating margin was up by 50 basis points in calendar 4Q15.

On the other hand, Colgate-Palmolive’s (CL) operating margin decreased to 3.6% in calendar 4Q15. (To learn more about Colgate’s calendar 4Q15 results, please read “Colgate’s Operating Margin Plunged in 4Q15.”)

Cash flow productivity

Clorox generated cash flow of $0.1 billion or about 8.2% of sales in fiscal 2Q16 compared with $0.2 billion in fiscal 2Q15. Despite its weaker top line, P&G generated $3 billion in adjusted free cash flow, with 101% adjusted free cash flow productivity. P&G is one of the strongest cash generators among competitive peers and mega-cap companies like Unilever (UL), Colgate-Palmolive (CL), and Kimberly-Clark (KMB).

Margin expansion

The company expects its EBIT (earnings before interest and taxes) margin to increase in the range of 50–75 basis points, reflecting about 100 basis points of gross margin expansion behind lower commodity costs. Clorox is also focusing on incremental investments that support the long-term health of its brands and drive top-line growth and improve margins.

CLX has exposure in the iShares Russell 3000 ETF (IWV) with 0.1% of the total weight of the portfolio as of February 8, 2016.

Continue to the next and final part of this series for our analysis of Clorox’s valuation multiple relative to peers.


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