Stock Market Sell-Off: Is Clorox a Buy?

The S&P 500 index is down by around 13% from where it was at the start of 2022 — about the same percentage that Clorox (CLX 0.48%) is down. However, the iconic maker of bleach and other consumer staples has been falling for a lot longer than that, and it is now more than 33% below its mid-2021 peak.

Now, it looks like the company’s prospects are finally starting to improve. Here’s why Clorox’s fiscal second-quarter 2023 results suggest that its stock may be worth adding to your shopping list.

Peak and trough

Clorox was one of the companies that experienced a huge demand spike for its wares during the early days of the coronavirus pandemic in 2020. Its cleaning products were in such high demand that it had to hire contract manufacturers just to keep them on retailers’ shelves.

While it’s hard for a consumer staples company to complain about a surge in demand, management was well aware that the spike was likely to be temporary. But it made hay while the Sun was shining, as the saying goes.

Image source: Getty Images.

When demand cooled off and inflation started to work its way through global supply chains, Clorox experienced a severe reversal of fortune. Notably, when the company reported results for its fiscal 2022 second quarter (which ended Dec. 31, 2021), it revealed that its gross margin had declined by a massive 12.4 percentage points to 33%. Investors were particularly displeased with that update and the stock fell sharply, perhaps justifiably so. 

At the time, management was clear in saying there was no easy fix. Chief Financial Officer Kevin Jacobsen explained that it would normally take 12 to 18 months for cost-cutting efforts and price increases to offset rising costs. But given the unusually intense inflation that was prevailing at that point, he expected it would be a longer process this time around. 

One year later

Clorox has just reported its fiscal 2023 second-quarter results, and, as predicted, its gross margins have not yet recovered to pre-pandemic levels. However, the company has pushed through four rounds of price increases. Cost-cutting has been ongoing as well. 

These efforts contributed to a year-over-year improvement in the gross margin of 320 basis points, pushing it up to 36.2%. Management expects another 200 to 300 basis points of “additional expansion” in its fiscal third quarter and perhaps a little more in its fourth quarter as well.

CLX data by YCharts.

While the company isn’t providing guidance as to when it believes it will be back to a more normal gross margin level (which would be something in the low- to mid-40% range), it looks like things are starting to look better for Clorox. Management was, in fact, fairly upbeat, hinting that the company had hit an inflection point in its efforts to claw back the gross margin it had lost.

That suggests that Clorox stock may also be at an inflection point, given the severe share price drop that accompanied the gross margin decline. Essentially, investors placed a lower valuation on the company given its reduction in profitability. As profitability improves, it is highly likely that investors will take a more positive view of the future and push the shares higher again.

The worst may be over

While management isn’t providing much guidance about specific gross margin numbers, it has provided a pretty clear indication that it has turned an important corner. That’s a good sign that the risk/reward profile has shifted in a positive direction. Clorox’s dividend yield, at roughly 3.1%, is still toward the high end of its historical range, suggesting the stock continues to be on the sale rack.

Even though the market has sold off and Clorox shares remain in the dumps, now might be a good time for long-term dividend investors to jump aboard.