Release Date: February 03, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Clorox Co (NYSE:CLX) is confident in its ability to rebuild gross margins to 44% this fiscal year and aims to expand EBIT margins by 25 to 50 basis points annually starting in fiscal year 2026.
• The company is assuming full control of its Glad business, which is expected to drive innovation and value creation.
• Clorox Co (NYSE:CLX) has fully restored distribution levels lost during the cyberattack and is now focused on building distribution through innovation.
• The company's international and professional segments are showing strong growth, driven by strategic investments and market penetration.
• Clorox Co (NYSE:CLX) is undergoing a comprehensive digital transformation, including a new ERP system, which is expected to enhance growth and productivity.

Negative Points

• Clorox Co (NYSE:CLX) is facing increased competitive activity in the Glad trash category, leading to more promotional spending.
• The company expects a noisy Q4 due to the ERP transition, which will impact sales and inventory levels.
• Clorox Co (NYSE:CLX) is experiencing FX headwinds and increased trade spending, which are affecting financial performance.
• The consumer environment remains challenging, with consumers exhibiting value-seeking behavior, impacting category growth.
• The company's gross margin in Q4 is expected to be down compared to the previous year due to lapping an unusually high base year.

Q & A Highlights

• Warning! GuruFocus has detected 7 Warning Signs with CLX.

Q: How confident are you in continuing to drive gross margin expansion beyond fiscal '25, and what are the longer-term drivers? A: Kevin Jacobsen, CFO, expressed confidence in rebuilding gross margins to 44% this year and aims to build EBIT margins by 25 to 50 basis points annually. Key drivers include productivity improvements, ERP conversion, and expanded cost-saving measures like design to value and net revenue management.

Q: With the Glad JV changes, is M&A expected to be a more important strategy going forward? A: Linda Rendle, CEO, stated that Clorox is excited to assume full control of the Glad business, with the timing related to the end of the current agreement. M&A remains a consideration, but only for opportunities that are accretive and offer strong returns. The focus remains on driving value through existing capabilities.

Q: Can you provide perspective on the organic sales outlook, especially with the ERP shipment benefit? A: Kevin Jacobsen explained that Q3 sales are expected to be down mid-single digits due to divestitures and FX headwinds, with organic growth in low single digits. Q4 will see mid- to high-single-digit growth due to the ERP transition, which will add 1 to 2 points of growth.

Q: How are you addressing increased competitive activity in the Litter and Glad categories? A: Linda Rendle noted that while Litter's promotional activity is in line with expectations, Glad is experiencing more competition than anticipated. Clorox is responding with promotions and innovation, emphasizing value-added benefits to maintain market share.

Q: What is the impact of the ERP transition on inventory and cash flow? A: Luc Bellet, Incoming CFO, explained that Clorox will build retailer and internal inventories ahead of the ERP transition to ensure product availability. This will temporarily tie up $50 to $100 million in cash, impacting free cash flow, but it will reverse in the first half of fiscal '26.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.