Clorox Wants to Be Known for Salad Dressing and Lip Balm, Not Just Bleach

NEW YORK (TheStreet) -- Clorox (CLX) may be best known for its stain-busting bleach, but the consumer-products giant also has big plans for its Hidden Valley salad dressing and all-natural personal-care line, Burt's Bees, as it seeks out new sources of growth.

"We think Hidden Valley is a gem of a brand that has the right to be in categories that we aren't in today," said Clorox CEO Benno Dorer in an interview. How that gem of a business is being polished up for Wall Street's eyes is taking two different shapes.

First, Clorox is adding a bit of flavor pizzazz to Hidden Valley's bottled salad dressings, which tend to only conjure up images of creamy, thick ranch.

"One of our strategies is to address market share opportunities in ranch whips with additional flavors," said Dorer, who became CEO in November. 

Recently, Hidden Valley has launched three new bottled salad-dressing flavors -- cucumber, avocado and sweet chili ranch -- as it attempts to gain share on the shelves of Wal-Mart (WMT) and Target (TGT).

For Hidden Valley's dry powder-dressing business, which Dorer describes as "very profitable," Clorox has tapped into the country's infatuation with a Greek yogurt-based product of its own. Hidden Valley Greek Yogurt Salad Dressing Mix is gluten free and offers a lower calorie alternative to normal ranch dressing.

The other component to Clorox unlocking value from the Hidden Valley brand is through the development of adjacent products, such as low-calorie dips in small containers for fans of snacking. "We launched pasta salads last year, and they've done well," Dorer said, mentioning that Clorox sees an opportunity to further expand into pre-packaged foods or flavor enhancers that help spice up home-prepared meals.

Clorox's push into salad dressings and related condiments arrives at an opportune time.

Unilever (UL), for instance, is in the midst of a major restructuring that has it focusing precious marketing and development resources on personal-care products instead of condiments. The company's Wish Bone dressing business was purchased by packaged-foods company Pinnacle Foods (PF) in 2013 for $580 million. Since then, Pinnacle has been changing Wish Bone's manufacturing process. Hence, that has left a void in the brand's new product development ad marketing.

Sales of Wish Bone products rose modestly in the first quarter as Pinnacle pulled back on promotional offers designed to tempt consumers. "Our Wish-Bone integration continues to remain on track, despite sales falling slightly behind our original expectations due to ongoing category softness and promotional intensity," said a Pinnacle executive on the company's April 30 earnings call. With Wish Bone's manufacturing now in-house, Pinnacle executives expect product innovation to kick back into gear.

Kraft (KRFT), a formidable competitor to Hidden Valley in bottled salad dressing, is preparing to be gobbled up by Warren Buffett's Berkshire Hathaway  (BRK.ABRK.B and 3G Capital. Kraft's merger with ketchup and mustard maker Heinz (the merger was coordinated by Berkshire Hathaway and 3G) comes after years of fledgling performance in key businesses, which has led to market share loss and the departure of valuable executives.

Kraft's long-running market-share losses, and now its integration with Heinz, have left its salad-dressing business open to inroads from Hidden Valley's latest innovations. Further share by Kraft may be ceded as Pinnacle Foods reawakens the Wish Bone brand next year.

Sales in Clorox's Lifestyle segment, which is made up of salad dressings, water-filtration systems and personal-care products, saw sales grow 3% in the third fiscal quarter. Pretax earnings rose 6%. Volume in salad dressings and sauces increased primarily due to new Hidden Valley dry mixes and dips. The sales and profit strength was also supported by new lip and face-care products from Burt's Bees. Clorox's water-filtration business came under sales pressure from competitive activity.

Burt's Bees, acquired by Clorox in 2007 for a lofty $925 million, also is being targeted by Dorer in a similar fashion as salad dressings. Dorer wants to expand into new product lines for a brand that is clearly resonating with customers. "There is an opportunity to take Burt's Bees into new consumer segments for those looking for an effective, yet natural solution," said Dorer.

For the first time, Clorox began TV marketing in the first quarter for Burt's Bees lip balms, which are now available in a range of flavors such as vanilla bean and wild cherry. The brand has expanded into wrinkle cream and body lotions.

But not everyone on Wall Street believes Clorox's more exciting, faster-growing businesses are enough to counter some fundamental concerns. Several of those concerns include discounting in the cat-litter business, where Clorox sells Fresh Step and Scoop Away, and the always price-sensitive bleach business. As a result of those concerns, Clorox's valuation may be too heady at the moment.

"While we respect the company's long-term focus and strong historical execution levels, we view the current valuation of 23 times consensus next 12-month EPS as expensive, as the stock is trading at a 13% premium to its historical two-year average and a 4% premium to its large-cap household consumer products peers," J.P. Morgan analyst John Fauchner wrote in an April 30 note. Fauchner rates Clorox shares at underweight, which is the equivalent of a sell rating.

Shares of Clorox have gained 1.5% year to date, outperforming the Dow Jones Industrial Average's 0.6% advance. Pinnacle Foods shares have increased 15.5%. Another competitor, Procter & Gamble  (PG), has shed 12.1%.

In the third quarter, Clorox saw lower shipments in cat litter in large part from relentless competitive activity. "Cat litter is an area we'd like to do better on -- in cat litter we are growing volume and sales, but not share," Dorer said. According to Dorer, Clorox is preparing a 2016 launch of a "major innovation" in cat litter. The undisclosed offering by Clorox would be in addition to recent efforts on odor limiting via the Scoop Away brand in the hope of stealing back market share.

As for good old-fashioned bleach, where Clorox has recently taken a cost-based price increase, shipments were down in the third quarter as consumers remained value conscious.

"The economy is still mixed, not unlike last fall -- importantly for us, we have seen our categories show some signs of life," Dorer sai. According to Nielsen data cited by Fauchner, Clorox's retail sales in tracked channels, including convenience stores, rose 3.1% for the 12 weeks ended March 21. For the 12 weeks ended on Dec. 27, retail sales rose by 1.2%. Dorer noted that Clorox's overall market share grew 2% in the third quarter, after being "flat for a while."

Dorer isn't wedded to the notion that all of Clorox's future growth has to be sourced from inside the company. "We are very interested in adding businesses in the area of health and wellness, professional and natural personal care," said Dorer. He concluded, "I'm looking to grow, and acquisitions will play a role in that."

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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