Despite Bounceback Talk, Clorox Prospects Could Be Brighter

The household-product maker is losing market share, which could pressure earnings.
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At first glance, it looks like comeback time for

Clorox

(CLX) - Get Report

.

Analysts are optimistic:

Prudential's

Constance Maneaty last week began coverage with a strong buy rating. Clorox shares have recovered ground since the company shocked investors this summer with an earnings warning, and new products are on the way. All that's missing is a tearful

Behind the Music

episode to complete the rehabilitation.

But don't add Clorox to the

Barry White-

Cher pantheon quite yet. A handful of nonbelievers aren't ready to call the bottom on Clorox. They're concerned that its cleaning-supplies and laundry businesses aren't taking the cleaning aisle by storm, and that there's still no evidence a recent acquisition was worth the $2 billion Clorox shelled out.

First Things First

Clorox, previously a Wall Street darling for its rapid profit and sales growth, dropped a bomb in August when it reported an unexpected decline in fiscal fourth-quarter revenue and said earnings would suffer for two quarters. The hitch? Integrating

First Brands

, maker of

Glad

wrap and

Scoop Away

cat litter, which Clorox bought in January.

Clorox shares, which had rocketed 350% over the last five years, dropped 28% to as low as about 38 as analysts reassessed the wisdom of the purchase and questioned whether Clorox could resume its stellar growth in the face of higher prices for resin (a key plastic component) and tough sales comparisons with previous years.

Clorox shares have since risen and now trade around 45. But that, say some, is more a matter of wishful thinking than evidence the company has turned the corner.

"There's no sign of a turnaround," says Andrew Shore, an analyst with

PaineWebber

who rates the stock neutral and whose firm hasn't done recent underwriting for Clorox. Clorox's earnings report for the fiscal first quarter ended Sept. 30 showed a 2% drop in laundry sales and a 7% decline in home-cleaning sales -- below Shore's expectations. He sees fiscal 2000 sales growing 3.7%.

Clean Slate?
Supporters contend Clorox shares are on the way up

Source: BigCharts

Caring and Sharing

Just take a gander at the company's share of its key market segments. In the four weeks ended Oct. 30, Clorox lost share in categories like lawn and garbage bags, according to figures from

ACNielsen

. That's no big surprise. First Brands suffered from excess retail inventories and is expected to see weaker sales until stores work off extra goods. But the latest figures also show that Clorox lost share in its core categories, including liquid bleach and liquid cleaners.

Clorox bulls say that will change as the company's new products catch on. But some of the early returns aren't outstanding.

Clorox Advantage

, which offers better margins than regular Clorox and is hard for private-label competitors to knock off, is underperforming. Early merchandising wasn't up to snuff, says Steve Austenfeld, a Clorox spokesman, who adds, "We have very high hopes for the brand, and that remains unchanged."

Clorox also faces stiff competition in some of the new product categories it's entered. Its

Fresh Care

, a knockoff of

Procter & Gamble's

(PG) - Get Report

Febreze

antistink fabric spray, has to duke it out with the original. It'll also go head-to-head with P&G in the water filtration business, now that P&G has acquired the

PUR

brand. Clorox spokesman Gil Roeder says the company has competed against the likes of P&G before and isn't daunted.

But "while management does expect an acceleration, we are more comfortable awaiting signs of market share improvement," wrote

Goldman Sachs'

Amy Low Chasen in a recent research report. (She rates Clorox shares market performer, and her firm has done investment banking for the company.) Given the time necessary to regain share, she says there's risk to her second-half estimate of 16% to 17% earnings-per-share growth.

Trash Talk

And no, trash talk about the merits of First Brands, for which Clorox paid $2 billion, including debt assumption (or about 1.7 times annual sales of $1.2 billion), hasn't yet ceased. The burden of proof is still on Clorox, thanks to the "enormous premium" of the acquisition, says Shore at PaineWebber.

"They need to prove to us that the First Brands business is a good business," he says, adding that it's still not clear Clorox can fold in First Brands, generate cost savings and perk up sales as quickly as investors expect. Clorox's Roeder says the rebound will become more apparent in the latter half of fiscal 2000, adding, "We're proceeding on track, and we're where we expected to be at this point."

Fans agree. Prudential's Maneaty, whose firm hasn't done recent underwriting for Clorox, wrote that moves like closing First Brands warehouses and negotiating new resin contracts are "within Clorox's control."

Jim Dormer, a

Morgan Stanley Dean Witter

analyst who thinks sales will rise 5% to 6% in calendar 2000, looks at Clorox and sees "the same company that has been outperforming for the previous five years." He adds that "I don't see anything different about the company today that prevents them from doing the same in the future." (He rates Clorox a strong buy, and his firm hasn't done underwriting for the company.)

Shore isn't so confident. "Things will get easier in the second half of the year," he says. "But I'm not entirely convinced that they're out of the woods yet."

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