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What’s Dragging Clorox Stock Down?

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Sluggish margins outlook

Clorox (CLX) disappointed investors with its margins performance in fiscal 2Q18. Moreover, the company expects its margins to continue to slide in coming quarters, reflecting increased cost pressure. Clorox’s management stated that it expects its fiscal 3Q18 and 4Q18 margins to decline on a YoY (year-over-year) basis as increased raw material prices and higher manufacturing and logistics costs are likely to take a toll on its profitability.

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During the last reported quarter, Clorox’s gross margin fell 170 basis points, reflecting an adverse impact of 110 basis points from increased raw material prices. Meanwhile, higher manufacturing and logistics costs lowered margins by 240 basis points. However, the company’s focus on productivity and cost savings partially offset the negatives and contributed about 170 basis points to its gross margins.

For the second half of fiscal 2Q18, higher-than-expected inflation in manufacturing and transportation costs are likely to hurt its margins. However, the planned launch of high-margin products, higher net price realization, and cost-savings are expected to support its margins.

What’s impacting Clorox’s top line?

Clorox’s top line is expected to grow by 1.0%–3.0% in fiscal 2018. Notably, new product launches are expected to support the company’s sales growth rate. Clorox’s management expects new product launches to contribute 3% to its top line growth rate in fiscal 2018.

However, the company’s overall sales growth rate is likely to be negatively impacted by the divestiture of its Aplicare business. Meanwhile, adverse channel mix and retailers lowering inventory could further pose challenges.

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