Cost pressure dragging margins down
Similar to its peers, Clorox (CLX) also disappointed investors with its sluggish margins. Consumer product manufacturers in the US are grappling with cost pressures stemming from inflation in commodity prices.
The recent hurricanes led to higher transportation costs due to carrier supply restraints. Lower pricing and increased marketing and advertising spending to drive volumes also pressured its margins.
Clorox’s margin performance in fiscal 2Q18
Clorox’s (CLX) gross margin decreased 170 basis points to 43.0% in fiscal 2Q18. This decline reflected increased commodity costs, which had an adverse impact of 110 basis points on gross margins.
The hurricanes further aggravated the raw material prices. Increased manufacturing and logistics costs also dented margins by 240 basis points.
Clorox’s focus on cost savings contributed 170 basis points to its gross margins. While higher net price realization added 30 basis points. Clorox’s EBIT (earnings before interest and tax) margins fell 30 basis points to 17.3%, reflecting lower gross margins offset in part by increased cost savings.
The margins for other major home and personal care product manufacturers Procter & Gamble (PG), Colgate-Palmolive (CL), and Kimberly-Clark (KMB) were subdued during their recent quarterly results. Increased cost pressure due to the reasons mentioned above, as well as lower pricing to drive volumes amid heightened competition, took a toll on their profit margins.
Clorox’s (CLX) management expects cost pressures to pressure its margins in the second half of fiscal 2018 and projects its fiscal 3Q18 and fiscal 4Q18 margins to decline on year-over-year. However, cost savings and increased pricing are expected to support its profit margins.
Innovation-led, margin-accretive new product launches planned for fiscal 2H18 are expected to boost Clorox’s margins.