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High Commodity Prices Begin to Ding Clorox Earnings

Thursday, 12 May 2011 03:36 PM

For chemical-products and consumer-goods maker Clorox (CLX), high commodities prices are starting to become a burden. The costs of inputs used to make the company's famous bleach, its Glad brand of trash bags, Hidden Valley salad dressings, and other products are rising.

In the third quarter ending March 31, sales grew 1.3 percent to $1.3 billion, primarily due to higher volume. Yet net income fell 8 percent to $151 million and gross margin fell by about 50 basis points to 44.1 percent from 44.6 percent in the year-ago quarter.

The decrease was primarily due to higher commodity, manufacturing, and logistics costs, the company said.

"As anticipated, we're seeing higher commodity costs and other inflationary pressures in the second half of our fiscal year, but at a higher rate than we had anticipated," Clorox Chief Financial Officer Dan Heinrich told investors. "The benefit of price increases and our successful cost-saving initiatives helped mitigate this cost inflation."

While demand across the company's several product categories was uneven, sales are recovering, although still a little flat.

"Our 1.3 percent sales growth is a significant improvement over the 3 percent decrease in the first half of the fiscal year, and we expect to see growth in the fourth quarter as well," Chairman and CEO Don Knauss said.

"Still, we face a challenging economic environment, as evidenced by weak category performance in the U.S. and increasing commodity costs. We are controlling those factors we can control, and we're confident we are taking the right actions to drive further efficiency, enable growth and maintain the long-term health of our brands."

Sales should remain flat for the rest of 2011 and rise by as high as 3 percent in 2012, the company adds.

Cheaper substitutes

More sustained economic recovery should help the company improve its business, Knauss says. "Clorox has great brands, great people and great capabilities. As we execute on our strategic plan, and the economy stabilizes and grows stronger, we anticipate achieving significantly improved results."

Yet the problem with passing rising costs on to consumers in Clorox's industry, analysts note, is that shoppers are often unwilling to pay more for such products and switch to cheaper, generic goods.

"Clorox's profitability faces ongoing pressure from volatile commodity input costs and foreign exchange rates, aggressive competition from larger manufacturers and private label, and the substitution of its premium-priced products by consumers," Moody's Investors Service writes in a report on Clorox.

Moody's currently has a stable outlook for Clorox.

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For chemical-products and consumer-goods maker Clorox (CLX), high commodities prices are starting to become a burden. The costs of inputs used to make the company's famous bleach, its Glad brand of trash bags, Hidden Valley salad dressings, and other products are...
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Thursday, 12 May 2011 03:36 PM
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