Consumer Sector Ideas

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>>> Church & Dwight Gains 30% in 3 Months on Pandemic-Led Demand


Zacks

August 13, 2020


https://finance.yahoo.com/news/church-dwight-gains-30-3-151303245.html


Amid all the coronavirus disruptions, a number of consumer staple companies appear to be on safe grounds. These companies are benefiting from the rising demand for essential items amid the pandemic-led increased at-home consumption and pantry-loading trends. One such player gaining from these trends is Church & Dwight Co., Inc. CHD, which has returned 30.3% in the past three months, outpacing the industry’s growth of 16.8%. Also, the company has comfortably outperformed the S&P 500 and the Zacks Consumer Staples sector’s respective gains of 16.5% and 12.5%.

Notably, Church & Dwight had earlier announced that all its products have been categorized as essential commodities, per the requirements and guidance of the government. Hence, the company has been witnessing significant increases in demand for its products, especially household cleaning products as consumers are focusing on increased cleanliness. Also, the demand for brands like FLAWLESS is benefiting from elevated at-home grooming sessions.

Other than Church & Dwight, other consumer staple stocks gaining from the increased demand trends include Clorox CLX, Colgate-Palmolive CL and Procter & Gamble PG, to name a few.

Robust Q2 Results & Guidance

Robust demand drove Church & Dwight in second-quarter 2020, wherein the top and bottom lines rose year over year and beat the consensus mark. Earnings were backed by solid sales, improved gross margin and reduced marketing costs. Results gained from the strong household and personal care businesses owing to consumers’ shifted preference for essential products amid the coronavirus outbreak. In this regard, the company witnessed double-digit growth in the consumption of products like gummy vitamins, women’s hair removal, cleaners and baking soda. Markedly, online sales also remained sturdy.

The solid results encouraged management to raise its sales and earnings guidance for 2020. The company now anticipates sales growth of 9-10% compared with 6.5% growth expected earlier. For 2020, adjusted earnings per share are expected to grow 13%, higher than the previously mentioned 7-9% increase. The robust outcome and guidance have been boosting investors’ sentiments as Church & Dwight’s shares have gained 5.3% since the earnings release on Jul 31.

Growth Drivers

Church & Dwight has been benefiting from a robust brand portfolio, thanks to its focus on innovation and buyouts. Notably, the company earlier said that it looks forward to having 20 power brands in its portfolio, over time. Additionally, the company’s regular innovation helps improve brand positions and market share in the consumer categories. During its first-quarter conference call, management stated that it is focused on innovation and R&D spending for product development even amid the pandemic.

Talking of buyouts, we note that FLAWLESS has been a prudent addition to Church & Dwight’s portfolio. Sales in the FLAWLESS brand contributed to its Consumer Domestic segment’s results in the second quarter of 2020. The brand witnessed robust consumption growth from May to July due to customers’ reduced access to salons. The brand is poised to keep gaining from rising at-home grooming trends and management has solid advertising plans in place for FLAWLESS for the second half of 2020. Some of the previous noteworthy acquisitions of the company include WATERPIK, Agro BioSciences and VIVISCAL business.

Can Margin Concerns be Offset?

The company is grappling with a rise in expenses, such as SG&A costs. Notably, adjusted SG&A expenses increased 30 bps in the second quarter of 2020 due to impacts of acquisitions, elevated incentive compensation and R&D investments. Additionally, the company witnessed escalated manufacturing costs due to COVID-19 supply-chain expenses. Management expects gross margin to fall in the second half due to new product promotional support, FLAWLESS accounting effect, increased tariffs on WATERPIK and additional investments in manufacturing and distribution capacity. Incidentally, management plans to make additional investments to boost manufacturing, R&D, consumer research, digital advertising, new product development and predictive analytics in the second half of 2020, which is likely to spike up costs.

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