The most pressing question heading into the quarter was whether Clorox (CLX) would be able to raise prices to offset inflationary headwinds without incurring a sustained hit to volumes. And we believe results give credence to our contention Clorox is weathering the current challenges well. In the quarter, Clorox chalked up 3% organic sales growth and 70 basis points of expansion at the gross margin line to 43.7%. Despite higher commodity and logistics costs, which ate into gross margins to the tune of 120 and 190 basis points, respectively, efforts to implement cost-justified price increases across the vast array of its product mix (a 220-basis-point benefit) and extract excess costs (a 140-basis-point favorable impact) were a plus.
We don’t believe these higher prices are impairing its leading share position. For one, management articulated that while its raised prices in the bleach category (actions not followed yet by its next closest competitor, private label), the firm still boasted around 100 basis points of market shares gains in the quarter (a category where it already maintains 60% share). Further, the firm cited that Hidden Valley Ranch grew share for the sixteenth consecutive quarter. We think this supports our contention it has carved out a wide moat partly stemming from its entrenched retail relationships and leading brands.
Management held the line on its full-year outlook that guides for 2%-4% sales growth and EPS of $6.20-$6.40, which aligns with our 3% and $6.25 forecast, respectively. And we don’t intend to revise our $137 fair value estimate (outside of a $1-$2 bump for the time value of money) or long-term targets (nearly 4% sales growth and 150-basis-point increase in operating margins over 2018 levels to 20% by 2028). After a mid-single-digit uptick, shares strikes us as lofty, trading around a 15% premium to our valuation, but we’d point to wide-moat Colgate as a more attractive option, trading at a 10% discount to our $70 fair value estimate.
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Erin Lash, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.