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Church & Dwight -- >>> The 6 Key

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gfp927z   Thursday, 05/16/13 08:47:03 PM
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Church & Dwight -- >>> The 6 Key Metrics of Church & Dwight

By Adam Levy

May 15, 2013


Last year, Church & Dwight (NYSE: CHD) CEO Jim Craigie focused on six key metrics he wanted to improve throughout the year. He called the initiative “fix the six.” After a successful 2012 saw the company’s stock climb 20%, shares have nearly added another 20%.

Most of this success can be attributed to Craigie’s initiative last year to fix the six. The company has kept it up so far in 2013. Here’s how the six stack up in the company’s most recent earnings report.

Organic revenue growth

Organic sales improved 2% in the most recent quarter. This comes on top of a record high 8.4% sales growth in the same period last year. The driving force behind the organic sales expansion was all volume, which increased 2.4%. 40 basis points were lost to negative product mix and pricing.

Once again, the company is growing much faster internationally than domestically. Organic sales improved 5.2% outside the U.S., with great success in Mexico, the U.K, and Australia.

The international market has huge potential for Church & Dwight as it currently derives just 20.7% of its revenue from outside the United States. Comparatively, Procter & Gamble (NYSE: PG) derives more than 60% of its revenue from abroad.

P&G has been rapidly expanding into emerging markets in the last decade, and now Church & Dwight is working to catch up. Its strong revenue growth abroad is a great sign that the company can compete with the market leader as it continues its international expansion.


Church & Dwight continued to improve its margins in the first quarter of 2013. For the first quarter the company reported gross margin of 44.9%, a 110 basis point expansion from the first quarter of 2012. That number, however, still remains well below its competitors, Procter & Gamble and Colgate-Palmolive, which both sport gross margins over 50%.

Still, the company is on a path to reach those levels. The company recently completed a new laundry detergent production plant that increased productivity, and has had a positive effect on gross margin.

The company also gained gross margin advantages from better than expected sales of its high-margin personal care brands as well as faster than expected cost savings on its Avid Health acquisition.

As a result, the company expects gross margin to continue to expand in 2013 by 25 to 50 basis points as opposed to its previous guidance of flat.

Operating margin, the third metric of the six, increased 100 basis points year-over-year to 20.7% - a company record. That significantly outperformed P&G’s operating margin of 16.5% last quarter, and is better than every single one of P&G’s previous four quarters.

So, where Church & Dwight still lags the competition in gross margins, the company makes up for it with lower operating expenses. Which brings me to the next metric …

Overhead costs

Church & Dwight currently has the highest revenue per employee of any company in the consumer packaged goods space. SG&A costs contracted 20 basis points last quarter compared to the year prior to 13.1% of sales. The Avid acquisition helped keep that number low, as it added sales with minimal overhead.

Comparatively, Procter & Gamble’s SG&A costs expanded 40 basis points last quarter as a percentage of net sales. P&G’s high overhead costs are typically about one-third of its sales.

The ability of Church & Dwight to operate efficiently is one of its greatest strengths, and it looks like that trend will continue for some time.

Market share

The company’s eight “power brands” performed very well in the first quarter with 7 out of 8 expanding market share.

Three factors contributed to the success. First, the company reinvested some of its increased profits from its value brands into increased marketing support. Marketing support expanded by 30 basis points last quarter, and is typical of the kind of marketing force Craigie has used recently to expand market share.

Second, the company has introduced several new products, mostly capitalizing on underserved niche markets. These products not only serve a market with practically no competition, they also have the added benefit of high margins. Examples include single dose cold sore treatments, toothbrushes that play One Direction songs, super high concentrated laundry detergent, and adult toys from its Trojan brand.

And the last factor is the company’s ability to increase distribution. The company has worked closely with key retailers to expand shelf space for its products, which helps increase visibility, and minimize out of stocks.

As the company continues to support its most profitable brands with expanded marketing efforts, generate new products, and improve distribution, market share ought to continue growing.


Earnings, while not exactly an afterthought, is simply a result of the company’s focus on the first five metrics. With the growth in sales, margins, market share, and reduction in overhead costs, earnings improved more than analysts expected.

In fact, this seems to be the trend, as Church & Dwight has beaten analysts estimates for 9 straight quarters. Last quarter, the company reported earnings of $0.76 per share, $0.04 better than analysts’ expectations.

For the year, the company expects to grow earnings 14% to $2.79 per share, but I wouldn’t be surprised if the company eeks out a few cents more. The first quarter was fantastic, and analysts currently expect a penny more.

The company has plenty of opportunities to continue its fantastic growth of the past few years, and with Jim Craigie’s focus on these six metrics I expect that to continue.

Strong international sales will fuel revenue expansion as the company improves margins and reduces overhead. Meanwhile, the company will continue expanding market share of its power brands in the States through increased marketing spend and the introduction of new products. All this ought to lead to further earnings growth, which means a good return for investors.


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