Spread of the novel coronavirus has led to the spread of fear, anxiety over
the disease has pushed governments to shut down cities in the U.S.
and around the world, it has tanked markets and sent investors fleeing to
safe investments that may help them ride out the storm.
And it has led consumers to sweep store shelves for food and other
products they might need as the virus spreads through their communities
and governments restrict their movement.
In times of fear, people flock toward brands they trust.
One of those brands is Clorox, a household products company perhaps best
known as a maker of its eponymous branded bleach.
As of March, 2020 shares of the century old California company were
hitting highs, not seen in at least several decades.
Clorox has long been a highly regarded firm, but the fear the disease is
inspired in both consumers and investors has sent shares soaring.
However, investors and analysts also say the spread of the coronavirus is
a peculiar situation and the boost the company is getting from it won't
last forever.
As awareness of the spreading novel coronavirus increased in early 2020,
Clorox shares skyrocketed.
They spiked dramatically in early February, around the time JP Morgan
upgraded the stock from underweight to overweight.
On March 18th, Clorox was trading at all time highs dating back to at least
1972. Short interest in the stock had fallen 7.5% since the beginning of
2020 through the middle of March, according to S3 partners.
By the market close on March 25th, the firm had seen an acceleration of
shorts buying shares to cover their positions as the virus spread deeper
into the US. Investors and Wall Street analysts list a few reasons why
Clorox has soared.
First is simple demand.
Health officials are warning consumers to wash their hands and disinfect
surfaces religiously.
And sales of cleaning products have skyrocketed.
Home care products accounted for 26% of Clorox is total sales in 2019,
according to a company filing.
Clorox sells products under several well-known brands.
There is the Clorox name itself, but also formula 409, Pine-Sol, S.O.S.,
Tilex, and others.
The U.S. Environmental Protection Agency lists several Clorox made goods
among disinfectants effective for use against the novel coronavirus.
Especially significant is Clorox's business in disinfecting wipes, which
have about 50% of the share of that category, according to Atlantic
Equities analyst Edward Lewis.
Clorox chairman and CEO Benno Dorer said in late March that the company had
seen an uptick in sales of its disinfecting wipes.
The company added production capacity to meet the increased demand and
reduce bottlenecks by limiting product variety, according to a March 18th
note from JP Morgan.
There are, of course, goods from several manufacturers on that EPA list,
and Clorox is, of course, not the only company that markets bleach, which
is widely available in generic and store brands, also known as private
labels. But Clorox has very strong brand power, which helps it lead in
categories such as bleach and disinfecting wipes, even when generic or
store brands substitutes are available at cheaper prices.
And those who follow retail say customers tend to flock to trusted brands
when they are nervous or fearful.
The third reason Clorox shares are soaring is that consumer products
companies tend to be pretty safe bets overall when the larger economy is
struggling. When times are tight, consumers pull back on luxuries and big
ticket items, fancy food, high end clothing, jewelry, restaurants, cars,
and vacations. But they don't stop cleaning their homes.
They still need bleach, laundry detergent, tile cleaner, sponges, garbage
bags, and cat litter, all of which Clorox sells.
An analysis by Deutsche Bank of market trends dating back to 1990 found
that companies that sell consumer staples such as home products
outperformed the S&P 500 during major geopolitical events, episodes of
exceptionally high trading volume, growth slowdowns, and recessions.
There are still other reasons why Clorox is a bit of a Wall Street darling
while markets are suffering, some of which might not seem that obvious.
About 56% of Clorox sales in 2019 went to costs of goods sold, and a big
portion of that was resin, which is used to make plastic.
Clorox depends heavily on resins for the manufacturer of its Glad line of
garbage bags and food containers.
Plastic resins come from oil and oil prices have tanked.
In early January 2020 oil traded above $60.
As of April 6, it was trading just above $25.
The dramatic drop in oil prices in early 2020 have provided some relief
for Clorox, which had been struggling with cost headwinds for several
quarters. The trouble is that falling resin prices tend to correlate also
with increased competition, as the company noted on a conference call with
investors in February 2020.
While we continue to make progress and have seen sequential improvement in
both volumes and sales, we've seen a further increase in competitive
activity consistent with what we've seen in the past period when there was
a pullback in resin price.
Even on a temporary basis.
In fact, prior to the outbreak of coronavirus, Clorox appeared to be beset
by some challenges. In October, 2019 shares of Clorox were trading at a 52
week low. Its share price finished 2019, just slightly down for the year,
while the S&P 500 was up more than 28% in the same timeframe.
The company had been battling rising transportation and labor costs that
began to surge in late 2017.
Clorox needed to raise prices to counter these headwinds, but raising
prices is tricky.
Investors were concerned over how the move would affect relationships with
retailers, especially those Clorox is closely tied to.
Among the challenges these large consumer goods companies face is
competition from lower priced store brands.
Walmart, which is the largest brick and mortar retailer in the world,
alone accounted for about a quarter of Clorox is total sales in 2019,
according to company filings.
No other single customer accounts for even 10% of Clorox's sales.
Walmart is also a large purveyor of its own store brands and is famous for
pressuring suppliers to keep their costs low.
A well-known Walmart slogan has long been everyday low prices.
Clorox found that it was able to raise prices for a while.
The company said in May of 2018 that it had still grown sales and market
share on higher priced disinfecting wipes, for example.
But over time, transportation costs fell again and competition stiffened.
Raising prices on existing products to adjust for rising costs is not
something these companies can easily afford to do anymore, some analysts
say. If Clorox wants to lure customers to a pricier detergent or garbage
bag, it needs to keep innovating.
The sheer volume of competition in many of its categories means it has to
keep churning out new products that are both novel and at least slightly
better than those of competitors to get customers to shell out a few extra
dollars. And we have launched two major innovations the last few weeks
that have a very significant impact to the planet, but also to our top and
bottom line as we expect them.
The first is a compacted version of Clorox liquid bleach.
That's shown to have very strong margin improvement for us in the past.
And we're doing it again and we're significantly reducing the amount of
plastic we use, water we use.
Logistics. The impact on logistics is significantly reduced.
So this is a great initiative all around.
The second one is our first ever compostable cleaning wipes.
You can compost them at home and that's off to a really nice start.
The company has introduced a few whole new product lines since 2018 in an
effort to serve new customers and new markets.
Examples include water bottles fitted with filters under Clorox's Brita
name, a widely known brand and home water filtration.
Clorox also launched a cosmetics line under its Burt's Bees brand, which
markets itself as an all natural and eco friendly line of skincare
products. We plan to be back to a solid sales growth that is in line with
our ongoing algorithm.
The midpoint of our outlook foresees about 3% in sales growth in the back
half and we're seeing solid momentum.
Q2 was an important proof point in progress.
We saw an important sequential improvement to sales, but we also saw gross
margin improvement, we saw earnings improvement, and we saw a strong 11%
cash flow growth for the year to date.
But many innovations are more subtle.
They're often small tweaks say a new flavor to a food product or a new
scent to a cat litter.
In just its cleaning lineup, the company has introduced several new
products since 2018.
Clorox came out with a new form of packaging for its disinfecting wipes.
The company says is more convenient and easier to use.
It also came out with an upgraded version of its wipes under the Clorox
Ultra Clean name.
The company said these wipes are tougher and better for a variety of jobs.
It was a response to feedback from customers reluctant to use wipes
because they tear, they aren't textured for scrubbing, or they aren't as
effective as cleaning sprays.
The idea is to keep meeting some small unmet need and in turn give
customers a reason to turn to a Clorox product rather than a brand that
might be cheaper. Of course, Clorox has a reputation for being a very
well-run company. It has been around for more than 100 years and it has
managed through decades of acquisitions and innovation to turn a business
built around a single product, bleach, into a broad portfolio of household
brands. And for now, that trust, brand recognition and the company's
knowledge of its customers needs is playing a large role in a surging
share performance. But investors don't seem to think its future is totally
secure. As of March 25th, it was still the second most shorted U.S.
stock in the household products category in terms of dollar value.
The question is, what happens next?