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What Drove Clorox’s Fiscal 4Q17 Margins?

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Aug. 8 2017, Updated 8:08 a.m. ET

Gross margin expanded

Clorox’s (CLX) fiscal 4Q17 gross margins showed improvement both on a YoY (year-over-year) and sequential basis. The company’s gross margin expanded 30 basis points YoY to 45.7%. Higher sales and cost savings boosted the company’s margin growth.

Clorox’s gross margin improved 150 basis points from cost savings. An increase in pricing helped the gross margin growth rate by 50 basis points. However, higher manufacturing and logistics costs dented its gross margin rate by 130 basis points, while inflation in commodity prices had an adverse impact of 90 basis points on its gross margin growth rate.

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Notably, Clorox’s peers are also relying on lowering costs to drive gross margin expansion. However, Kimberly-Clark (KMB) and Procter & Gamble (PG) saw YoY declines in their gross margin rate during the recently concluded quarter. The benefits from cost savings were more than offset by lower selling prices and higher commodity costs.

In contrast, Colgate-Palmolive’s (CL) gross margins expanded during the last reported quarter as higher pricing and increased cost savings more than offset the adverse impact of inflation on raw material costs.

EBIT margins expanded significantly

Clorox’s fiscal 4Q17 EBIT margins expanded 220 basis points to 19.2%, reflecting lower selling and administrative expenses and a decline in advertising and sales promotion spending. The company’s pre-tax profits grew across all segments. Higher sales and lower costs more than offset the negatives stemming from an unfavorable mix and increased commodity costs.

Outlook

Clorox expects its fiscal 2018 gross margins to improve slightly. Margins are projected to benefit from higher pricing and cost savings. However, higher commodity costs are expected to remain a drag. Moreover, its EBIT margins are anticipated to improve modestly, driven by productivity savings.

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