Clorox Stock Drops 10%: A Golden Buying Opportunity?

Clorox (CLX -0.86%) has seen a significant decline of 10.1% in its stock price year-to-date, with most of this drop happening recently after the company released its second-quarter fiscal 2025 results. This well-known brand, which produces bleach, Kingsford charcoal, Hidden Valley Ranch salad dressing, Burt's Bees products, and more, has faced many ups and downs in recent years. However, it appears that the end of its challenging turnaround phase may finally be on the horizon.

With a steady dividend yield of 3.3% and a remarkable record of 40 consecutive years of dividend increases, Clorox stands out as a solid choice for investors seeking passive income—provided the company's fundamental business aspects show signs of improvement. Let’s take a closer look at why the recent stock drop might represent a prime buying opportunity for long-term investors.

Recovery in Sight

Over the past five years, Clorox has experienced erratic earnings due to various external and internal factors. Initially, during the COVID-19 pandemic, the company benefited from a surge in demand for cleaning and hygiene products. However, as time went on, Clorox overestimated the longevity of this demand, which left the company especially vulnerable to challenges such as supply chain disruptions and inflationary pressures.

In August 2021, Clorox unveiled a five-year plan aimed at upgrading its enterprise resource planning (ERP) system. This plan involves transitioning to a cloud-based platform, along with investments in other digital technologies to modernize internal operations ranging from supply chain management to finance and data handling. The overall cost of this initiative is estimated to be between $560 million and $580 million.

In its fourth quarter of fiscal 2023, Clorox reported a noncash impairment charge of $445 million in its Vitamins, Minerals, and Supplements segment, as the company sought to streamline its portfolio and focus on its core brands. Additionally, in fiscal 2024, Clorox incurred a one-time noncash pension settlement charge of $171 million. It also dealt with the ramifications of a detrimental cyberattack that mostly affected its results for fiscal 2023 and 2024. Furthermore, in March 2024, the company announced the divestiture of its operations in Argentina, Uruguay, and Paraguay.

Consequently, Clorox has not experienced a 'normal' operational year since before the pandemic began. A more accurate measure of the company's performance can be derived from its adjusted earnings, which eliminate one-time costs and reflect the core operations' performance.

Investing for Future Growth

Clorox is currently prioritizing margin enhancement rather than simply pursuing revenue growth. In the most recent quarter, the second quarter of fiscal 2025, Clorox marked its ninth consecutive quarter of gross margin improvement. For the fiscal year, the company expects organic sales growth between 3% and 5%, excluding the effects of the ERP transition. Clorox also anticipates gross margin expansion of 125 to 150 basis points for the entire 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 represents a year-over-year increase of 16% at the midpoint. This translates to a 20.4 adjusted price-to-earnings ratio based on the expected results for fiscal 2025 (ending June 30) and a share price of $145.95 at the time of writing.

While focusing on profitability, advertising and sales remain crucial components of Clorox's strategy. The company is not merely implementing extensive cost-cutting measures; instead, it aims to invest in its most successful and profitable brands. For fiscal 2025, Clorox expects selling and administrative expenses to constitute 15% to 16% of net sales, while advertising and sales promotions should account for 11% to 11.5%.

The company's assertive spending on general and administrative expenses is notable because it directly impacts operating margins rather than just gross margins. While the gross margins are on the rise, Clorox will ultimately need to prove that it can also maintain healthy operating margins. The ERP investments are designed to enhance efficiency and, consequently, improve operating margins, but the effectiveness of this spending remains to be seen.

Although Clorox's revenue has plateaued since its pandemic-driven growth, gross margins have rebounded. However, operating margins are still trailing a few percentage points below pre-pandemic levels.

Why Clorox May Be a Good Buy

Investing in Clorox at this juncture is a decision about management's capability to implement effective changes in the business through internal processes and prioritizing advertising around core brands. By focusing on its leading brands, Clorox is emphasizing gross margin expansion over revenue growth, which could allow it to capture market share in critical categories if its advertising strategies succeed.

The appealing 3.3% dividend yield also serves as a strong incentive for stock ownership, especially as the company's turnaround strategy is expected to reach fruition within the next year or two.

Clorox, Dividend, Stock