Clorox's sales jumped 33%. Why did its gross margin fall?

Clorox's sales rose 33% in its first fiscal quarter, yet its gross margin fell to 40.4% from 41.7%. A powerful sales comparison is running into a more difficult cost environment.

The company kept its fiscal 2027 adjusted earnings forecast at $5.70 to $6.00 a share, but now expects to finish closer to the low end. It also lowered its annual gross-margin expectation to 41.5% from about 42%.

The rebound starts with last year's inventory

Sales reached $1.905 billion in the quarter ended September 30. The GOJO acquisition contributed about 15 percentage points of growth. Organic sales, excluding acquisitions and currency changes, rose 18%.

Clorox attributes approximately 18 points of that organic growth to an easier comparison with last year's inventory drawdown. Retailers had stocked up before the company's new planning system went live, then reduced orders as they used that inventory.

The same comparison is important for earnings. Adjusted EPS rose to $1.55 from $0.85, after removing selected acquisition and transformation costs.

Research by Ticker Byline shows that the company's estimated 90-cent benefit from the inventory comparison exceeded the entire 70-cent increase in adjusted EPS. The rebound reflects an easier base as well as this year's performance.

Costs are taking more of each sales dollar

Higher commodity, manufacturing and logistics costs outweighed the benefits of pricing and cost savings in the gross margin. Some acquired GOJO inventory was also recorded at a higher value, increasing the cost recognized as it was sold.

The annual outlook now reflects stronger inflationary pressure. Clorox expects selling and administrative expenses to fall to 15.5% of sales, versus the earlier 16% forecast, helping cushion the lower gross margin.

The annual sales-growth forecast remains 13% to 14%. Much of that increase still comes from GOJO and the inventory comparison.

The deals are closed; the integration continues

Clorox completed the GOJO purchase on April 1. The business now operates within Clorox Purell ProCare, where a unified sales and service organization has been launched.

Cash generation improved alongside the sales rebound. Operating cash flow was $143 million, versus $93 million a year earlier. After $38 million of capital spending, free cash flow was $105 million, up from $57 million.

The Clorox company profile tracks the margin outlook, debt and cash flow, alongside the completed GOJO acquisition and Glad stake purchase.