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Clorox Company (CLX)

Clorox (CLX) started in 1913 when five businessmen invested $100 each to start manufacturing and selling one product, Clorox bleach. Impressively, the company remained a one-product business for its first 56 years. Today, Clorox has over 8,100 employees, sells its products in more than 100 countries, and generates $6 billion in annual sales.

The company boasts a brand portfolio spanning numerous product categories including home care, laundry, charcoal, food, water filtration, cat litter, and more. Some of the company’s famous brands are Clorox, Pine-Sol (household cleaner), Glad (plastic wrap, trash bags), Kingsford (charcoal for grilling), Hidden Valley (salad dressing), Brita (water filters), and Burt’s Bees (skin care).
As seen below, Clorox generates 34% of its sales from cleaning products, 33% from household products, and 16% from lifestyle products. Faster-growing international markets account for 17% of revenue.
Source: Clorox Investor Presentation

Business Analysis

As a consumer products company, Clorox's primary competitive advantages are its strong portfolio of brands, shelf space with retailers, marketing expertise, and product innovation.

With the Clorox brand dating back more than 100 years, Clorox has benefited from being one of the first brands in consumers’ minds for most of its key product categories. When you walk down the aisle of your favorite retailer and see Clorox's main household brands, you know they will deliver quality and get the job done.

As a result, over 80% of Clorox's sales are generated from brands with number one or number two market share positions. Overall, Clorox has more than 20% market share in its addressable markets and is around three times the size of its next largest branded competitor. The company focuses on attaining large market shares in mid-sized product categories, which also helps it avoid going head-to-head as much with giants such as Procter & Gamble (PG).
Source: Clorox Investor Presentation
The non-food consumer products space also tends to be very sticky and generally less subject to change. According to IRI Market Advantage, 85% of American household needs are consistently filled with the same 150 items, and 60-80% of new product launches fail.

In other words, Clorox maintains a durable and sticky market position, and new entrants tend to struggle to win over consumers who are happy with incumbents’ offerings.

However, to ensure it stays relevant, the company is constantly conducting consumer research to help it launch innovative products and sharpen its marketing campaigns. Clorox routinely invests around 10% of sales back into advertising (approximately $600 million annually) and spent another $135 million on research and development (2.3% of sales) last fiscal year.

Smaller competitors and new entrants don’t have the financial firepower to build up their brand recognition with consumers and retailers, and Clorox's spending has been very effective. While many large consumer staples companies have struggled to grow in recent years, Clorox's product innovation has continued driving 2% to 3% incremental sales growth over the past decade.

Impressively, the company also notes that 72% of its portfolio has growing or stable household penetration, up from 31% in fiscal 2013. In other words, management has been doing an excellent job delivering in-demand products that consumers value. 
Source: Clorox Investor Presentation
Clorox's extensive distribution networks around the world are another major strength. Clorox can expand the types of products under its brands or acquire new products and sell them throughout the world very efficiently. 

For example, the company launched an all-natural makeup line under its Burt’s Bees brand last year, expanding into a major new product category (cosmetics) with appealing long-term growth potential. Since consumers are already very familiar with the Burt’s Bees brand, Clorox can more easily grow its business in new areas.

Management is also known for making bolt-on acquisitions. While most of its deals are smaller in size, some of Clorox's notable deals include Burt's Bees (acquired in 2007 for $925 million), a manufacturer of natural personal care products, and Renew Life (acquired in 2016 for $290 million), the #1 brand of probiotics in the natural channel. 

These deals gave the company new platforms in fast-growing, higher-margin consumer-product categories. Clorox can continue taking share in these areas by leveraging its extensive distribution networks, large advertising budget, and significant R&D spending. 

Finally, Clorox's vertical integration and efficiency initiatives help keep its product costs very competitive. The company’s cost-savings program has delivered about $100 million or more in annual savings since 2003, contributing at least 150 basis points of annual operating margin benefit for more than a decade.
Source: Clorox Investor Presentation

Management continues to see opportunities for further margin improvement as well. One lever the company frequently pulls is leveraging its brands pricing power. Not only does this help grow profits, but the ability to raise prices also helps mitigate input cost inflation. 

Overall, the company expects to grow its sales by 3% to 5% per year and improve operating margins by 25 to 50 basis points per year, resulting in a very healthy free cash flow margin of at least 10%. 

Emerging markets are an important part of the company's growth goal, so it's worth noting that Clorox's business is strong in these regions as well with over 80% of its brands ranked #1 or #2 in their market. 
Source: Clorox Investor Presentation

With strong brands, extensive distribution channels, relevant marketing campaigns, leading market share positions, and large and fragmented markets, Clorox appears to have plenty of opportunities ahead of it.

Key Risks

Perhaps one of the biggest uncertainties surrounding Clorox's business is whether or not the company can continue growing at such a high level of profitability.

Clorox's operating margin hit an all-time high last fiscal year and sits near 19%. The company's profitability has benefited from solid market share gains, excellent pricing power, continuous cost-savings initiatives, and occasional tailwinds from lower raw material costs. 
 
With many consumer staples companies struggling to generate profitable growth, competitive activity could increase. Meaningful share gains in Clorox's lucrative mid-sized categories could also be more difficult to come by as the company's size increases. 

Furthermore, Walmart accounted for 26% of Clorox's revenue last year, and the company's five largest customers generate nearly half of its overall revenue. As the retail world faces increasing pressure from e-commerce, some of Clorox's major customers might see its margins and try to squeeze more pricing concessions out of the business.  

Fortunately, Clorox sells its products through many different channels, including Amazon (AMZN) and Jet.com (owned by Wal-Mart). In fact, e-commerce accounted for 4% of the company's revenue last year and has grown by more than 35% annually over the last three years. 

Private label is always a threat as well. Consumers are getting smarter about how they shop and what products they can trust. Information is more available than ever before. Clorox has noted that private label products have historically accounted for about 20% to 30% of the market. If more consumers trade down, demand for Clorox's higher-priced branded goods could slow.

To help minimize this risk of shifting consumer tastes, Clorox has been highly aggressive in spending a growing share of its advertising on digital media to target younger consumers such as Millennials. Over half of the company's media budget now goes to digital marketing activities, up from 34% in 2015.  

The consumer-packaged goods industry is also a fairly mature market. With low growth rates, large incumbents can quickly find themselves treading water – some brands are growing, others are shrinking. This is what P&G has struggled with for years.

While Clorox is much smaller than P&G ($6 billion in sales versus $65 billion), it’s possible that some of its larger product categories eventually find themselves in similar situations, especially considering the company’s concentration in the slower-growing U.S. market (83% of revenue).

For now, Clorox is showing no signs of weakness. The company continues putting up low-single digit volume growth across its portfolio and has done an excellent job expanding into adjacent product categories and geographies while delivering effective marketing campaigns.

Closing Thoughts on Clorox

Few companies have been as reliable as Clorox. The business generates excellent free cash flow, sells recession-resistant products, and has reliably increased its dividend ever year since 1977. 

 Thanks to management's continuous investments in advertising, R&D, and strategic bolt-on acquisitions, Clorox's brands have withstood the test of time and seem likely to remain core household purchases for many years to come. 

While private label products, relations with large customers such as Wal-Mart, shifting consumer preferences, and mature product categories will always remain threats, there isn’t much to dislike about Clorox's fundamentals. The company represents one of the best-managed and most profitable blue-chip names in the defensive consumer products industry.

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