Not too long ago, stocks such as Clorox (CLX) , Procter & Gamble (PG) , and Kimberly-Clark (KMB) found themselves as unlikely market darlings. Fear about the burgeoning coronavirus in early 2020 led to scenes of mad scrambles for cleaning products, toilet paper, and more with each of these names scrambling to stock shelves.
While the scenes were chaotic for shoppers, they were helpful to shareholders who saw shares boosted to all-time highs on the soaring demand. However, the trajectory since has been less than encouraging and, after an abysmal earnings release from Clorox last week, investors are understandably reassessing these pandemic-driven staples stocks.
Clorox Clean-Out
To be fair to the trend, it would be hard to imagine demand for products like those from Clorox ever reaching quite the heights that the 2020 zenith saw in many of these names. However, few expected quite the sudden retraction seen by Clorox in last week's earnings release.
The company reported a decline on both the top and bottom lines and tempered guidance, touting higher costs and lessened demand.
"We faced significant cost headwinds in a volatile operating environment in Q2," CEO Linda Rendle acknowledged. "We anticipate this highly dynamic and challenging environment to persist over the near term and [we] adjusted our fiscal 2022 outlook as a result."
While she remained confident in brand superiority and persistent demand to carry the company through the headwinds, analysts were not as convinced.
The results motivated Atlantic Equities and Morgan Stanley to downgrade the stock to "Underweight" and trim price targets, while previously bearish firms like J.P. Morgan and Barclays reiterated their negative outlook for the stock despite the optimistic comments from management.
Amid the commotion, the stock slumped about 15% into the end of the week, dragging down many of its peers along the way given the macro commentary.
To be sure, some analysts were not ready to abandon the name.
"Although we are taking our medicine now, we think the stock is a Buy at these levels," Citi analyst Wendy Nicholson wrote in a note to clients.
Still, even she cut her price target to $160 from an ambitious $194, advising clients to temper expectations even amidst the opportunity she encouraged.
Inflation vs. Omicron
The opportunity may well be available yet, given the persistent fears of variants that emerge over time. At present, no name has taken hold of the market to quite the degree as Omicron, the newer and more virulent strain of coronavirus that cropped up at the close of 2021.
According to the Environmental protection Agency, products like Clorox are useful in preventing spread on surfaces and therefore critical to prevention. As such, if case numbers continue to carry upward, the demand that made Clorox such a critical beneficiary of early Covid spikes could certainly resurface.
The equation for Clorox moving forward is one that not only incorporates demand, however. It also must account for inflationary concerns that are putting major pressure on the firm. The problem that provoked such a slide in the presumably "safe stock" was fueled by pinched margins that prompted such a glaring miss on profitability.
"I do think that's going to take some time given the level of inflation we're dealing with and I think you're hearing from us and a lot of peers," Clorox CFO Kevin Jacobsen told analysts on the firm's earnings call. "This is a unique environment with an extreme level of cost inflation."
Per the earnings release, gross margins were cut by over 12%.
Clearly, these inflationary concerns and supply-chain issues that are shrinking margins are not unique to Clorox either. As such, Kleenex-maker Kimberly-Clark has seen its share price cut nearly 10% in the past week, while Anglo-Dutch leader Unilever (UL) has slid strongly as these headwinds add to its own host of issues. Additionally, both Church & Dwight (CHD) and Procter & Gamble have taken comparably mild hits in their own right.
Managing Margins
In the end, it is this comparative impact that is pertinent for investors, as stock-picking appears a paramount issue in the fallout from Covid and Omicron impacts.
For example, the comparatively mild hits to names such as Church & Dwight and Procter & Gamble pale in comparison to steady gains from the dividend-driven stocks in the past year. In fact, in stark contrast to Clorox, both Procter and Church & Dwight shares have soared nearly 25% in the past year, cruising past even their early-Covid highs.
This resilience seems fueled overwhelmingly by an ability to apparently overcome inflation and maintain demand dynamics despite market headwinds.
"I think we're better positioned for dealing with an inflationary environment or revenue management in that sense than we've ever been before," Procter & Gamble CFO Andre Schulten told analysts in late January. "Starting with a portfolio that is focused on daily use categories health, hygiene and cleaning that are essential to the consumer versus discretionary categories, which in these environments are the first ones to lose focus from the consumer."
Similarly, Church & Dwight noted that it will take action to raise prices on 80% of its brands this month, with eyes on additional maneuvers. As the company managed to beat on earnings and maintain demand in its most recently published results, its pricing power appears able to withstand and overcome pressure on margins.
These commentaries come in direct contrast to results from Clorox, suggesting that the execution amid this pressure is the key issue. Additionally, it highlights for investors the idea that inflation, not Omicron, is the important headwind for companies to get a handle on at the moment.
Stock-pickers, therefore, must select accordingly.
