Unrelenting Cost Burden Fails to Prompt Clorox to Wipe Brand Spend Off the Table; Shares Attractive

Despite posting fiscal 2022 marks (3% net sales decline and $4.10 in adjusted EPS) bang in line with our outlook (down 3.1% and $4.09), Clorox sounded the alarm on its fiscal 2023 profit potential, calling for $3.85-$4.22 in adjusted EPS versus our pre-print $5.54 estimate (partly due to 24% tax rate versus our 22.5% forecast). This sent shares down by a mid-single-digit percent. We don’t deny higher manufacturing and logistics (a 290-basis-point drain in the fourth quarter) and commodity (350 basis points) costs persist. However, we think efforts to scour the business in search of inefficiencies (with cost savings proving a 190-basis-point benefit) and to raise prices (330 basis points) should manifest in continued sequential margin gains. In this context, gross margins amounted to 37.1% in the fourth quarter, up from a nadir of 33% in the second quarter and 35.9% in the third quarter.