Why Clorox Stock is a Buy Now Despite a 10% Decline

Clorox (CLX) has seen a decline of 10.1% this year, with a significant portion of this drop occurring following the release of its second-quarter fiscal 2025 results. Known for products like bleach, Kingsford charcoal, Hidden Valley Ranch, and Burt's Bees, Clorox has faced numerous ups and downs over the years. However, signs indicate that its turnaround may soon be complete.

With a dividend yield of 3.3% and a history of 40 consecutive years of dividend increases, Clorox presents an attractive opportunity for passive income. That said, the improvement of its underlying business fundamentals is essential. This article explores why the recent dip in Clorox stock could be viewed as a buying opportunity for long-term investors.

Progressing Towards Stabilization

Clorox’s earnings have fluctuated significantly over the past five years due to various external and internal factors. During the COVID-19 pandemic, the demand for cleaning and hygiene products surged, benefiting Clorox initially. However, as the company miscalculated future demand, it became susceptible to supply chain issues and inflation.

In August 2021, amidst the pandemic, Clorox disclosed a five-year strategy to revamp its enterprise resource planning (ERP) system, shift to cloud technology, and invest in various digital advancements. This effort aims to enhance internal operations across several areas, including supply chain management and finance. The anticipated cost for this modernization is estimated to be between $560 million and $580 million.

Additionally, in the fourth quarter of fiscal 2023, Clorox incurred a noncash impairment charge of $445 million in its Vitamins, Minerals, and Supplements division as part of a reorganization effort focused on its primary brands. In fiscal 2024, the company recognized a one-off noncash pension settlement cost of $171 million. A cyberattack also negatively impacted its fiscal 2023 and 2024 performance. Furthermore, Clorox announced the divestiture of its operations in Argentina, Uruguay, and Paraguay in March 2024.

Clearly, Clorox has not experienced a typical year since before the pandemic. A better metric to evaluate the company's performance is its adjusted earnings, which exclude one-time costs and consider the ERP investment's additional expenses.

Long-Term Growth Initiatives

Recently, Clorox has concentrated on enhancing its profit margins instead of prioritizing revenue growth. The latest quarter, Q2 fiscal 2025, marked the ninth consecutive quarter of improved gross margins. For the entire fiscal year, Clorox anticipates organic sales growth of 3% to 5%, excluding the ERP transition impact. The company projects gross margin expansion of 125 to 150 basis points for the full fiscal year.

Clorox has raised its adjusted earnings per share forecast for the fiscal year to a range of $6.95 to $7.35, which reflects a year-over-year increase of 16% at its midpoint. This implies a 20.4 adjusted price-to-earnings ratio based on the projected fiscal 2025 results and a share price of $145.95.

Though the focus lies on profitability, Clorox acknowledges the importance of advertising and sales as part of its strategy. It is not merely executing drastic cost reductions for marginal gains; instead, it is investing in its strongest brands to drive revenue. Clorox expects selling and administrative expenses to account for 15% to 16% of net sales, with advertising and sales promotions ranging from 11% to 11.5%.

This notable spending on sales and marketing impacts operating margins, not just gross margins. Clorox's gross margins may be expanding, but the company must also demonstrate that it can maintain robust operating margins. The investments in the ERP initiative seek to enhance efficiency, which should, in turn, improve operating margins, although the effectiveness of this expenditure is still uncertain.

Why Clorox May be Worth Buying

Investing in Clorox now can be seen as a bet on the company's management effectively restructuring its operations and properly allocating advertising resources toward its core brands. By prioritizing its leading brands, Clorox aims to expand gross margins over revenue growth, potentially allowing it to gain market share in its primary categories if its advertising efforts are successful.

The attractive 3.3% dividend yield further enhances the incentive to own the stock, particularly as the turnaround is expected to be nearing its conclusion within the next couple of years.

Clorox, Stock, Dividend