The Clorox Company (CLX) reported fiscal fourth-quarter results Wednesday that showed modest top-line expansion and poor earnings-quality growth. The firm managed to leverage a 4% increase in revenue (2% from volume) into a 20% jump in earnings per share, but the latter was primarily bolstered by a lower tax rate (down 450 basis points) and share buybacks. Pre-tax earnings from continuing operations were weighed down by higher commodity costs and higher advertising spend (the firm’s gross margin fell 80 basis points), and they only increased 5% during the period.
Clorox hopes that pricing increases through fiscal 2012 will help offset even higher expected commodity prices, helping to preserve gross margins at current levels for the fiscal year. We’re skeptical that Clorox will be able to do so without discouraging marginal cash-strapped customers (gross margins will fall as much as 175 basis points in its fiscal 2012 first quarter) and believe its meager growth trajectory (sales growth expected to be 1% to 3% during fiscal 2012) will provide little comfort for investors in this economic climate. We’re also somewhat concerned that management suggested that well over half of fiscal 2012 earnings (60% to 65%) will come in the back half, leaving open the possibility for a subsequent disappointment in the quarters ahead, in our opinion.
We believe shareholders would have been better off if the board accepted Icahn’s bid of $80 per share. However, we now believe the likelihood of finalizing an Icahn takeover (or from another suitor) is relatively slim and encourage investors to look for better investment opportunities than Clorox at this time.
