Church & Dwight (CHD) Gains In High Demand Due To Cost Issues – August 25, 2021
Church and Dwight Co., Inc. (CHD – Free Report) has benefited from growing consumer demand for its products, especially amid pandemic-induced home consumption. The company’s strong brands, supported by a focus on innovation and buyouts, have helped it make the most of these trends. Apart from that, the company’s online sales have increased. Such advantages fueled Church & Dwight in the second quarter of 2021, where both top and bottom results rose year over year and exceeded Zacks’ consensus estimate.
However, the company is struggling with headwinds in the supply chain, which has weighed on its sales forecast. It also faces rising input costs, which are expected to persist until 2021. Together, these factors have shaken management’s earnings outlook. We note that in their last earnings call, management reduced their view on sales and earnings, although the numbers still suggest year-over-year growth. Let’s dig deeper.
The pandemic driven by a driver’s demand
In the second quarter of 2021, net sales of $ 1,271.1 million were up 6.4% year-over-year and topped Zacks’ consensus estimate of $ 1,255 million. Church & Dwight continued to experience robust consumption during the quarter. The company saw consumption gains in 13 of 16 household categories, such as gummy vitamins, dry shampoo, water flossers and cat litter. The personal care category of the business benefits from greater consumer mobility. The international business saw an overall improvement in organic sales despite a number of countries facing lockdowns. Although management has lowered its forecast for organic sales and sales for 2021 due to headwinds in the supply chain, the view still suggests year-over-year growth. He now expects sales to grow by around 5% compared to the 5-6% increase he expected earlier.
In the quarter, organic sales increased 4.5%, fueled by volume gains. Organic sales are expected to increase by almost 4% in 2021, compared to an increase of 4 to 5% earlier. For the third quarter of 2021, organic sales are expected to increase by almost 1.5%. Church & Dwight’s e-commerce sales subsequently played an important role amid the pandemic, supported by consumers’ accelerated online shopping preferences. In the second quarter of 2021, global online sales grew 7.2% and accounted for 14.2% of quarterly sales. For 2021, the company estimates that online sales represent 15% of total sales.
Image source: Zacks Investment Research
Aids to brand strength
Church & Dwight has strengthened its brand portfolio with solid innovation and lucrative buyouts. Management sees innovation as a major growth driver and is encouraged for its product launches in 2021. The company has launched OXICLEAN Laundry and Home Sanitizer in its household products portfolio. In its personal care products space, VITAFUSION showcased elderberry gummies, triple immune gummies and Power Zinc gummies to make the most of the growing consumer trend to boost immunity. In addition, WATERPIK offered WATERPIK ION, which is a water flosser. FLAWLESS is also focused on capitalizing on growing trends in home beauty and personal care – with at-home manicure and pedicure options.
Speaking of buyouts, the company acquired Matrixx Initiatives in December 2020, owner of the ZICAM brand. Zicam is one of the leading zinc supplements in the United States in the category of vitamins, minerals, and supplements (VMS) for cough / cold. Apart from that, the buyouts of FLAWLESS and WATERPIK were cautious additions to the portfolio of Church & Dwight, which are also key subsidiaries of the company. In the Consumer Domestic unit, WATERPIK consumption climbed 72% in the second quarter, driven by increased consumer focus on health and wellness, and a rebound from pandemic-induced lows.
During the second quarter of 2021, Church & Dwight encountered a shortage of several raw materials. Apart from this, the company faces supply-related hurdles due to labor shortages and transportation issues. Gross margin decreased 340 basis points (bps) to 43.4% due to high distribution costs and increased manufacturing costs, mainly due to raw materials and high tariffs. The company further stated that it slowed the marketing of some products, primarily household products, in the second quarter due to reduced case fill rates.
Management expects increased input and transportation costs for the remainder of 2021. Its gross margin guidance reflects significant inflation in material and component costs. Management now expects additional input costs of $ 125 million for 2021 compared to the $ 90 million previously expected. However, this should be partly offset by cutbacks in coupons and promotions, lower general and administrative costs, and announced price increases. Church & Dwight is on the right track in its pricing efforts to counter rising costs for raw materials, labor and transportation. That said, the full benefit of pricing actions will only be felt in 2022. Gross margin in 2021 is expected to contract 75 basis points from the earlier forecast to be stable year over year.
Management has reduced its view of profits due to high input costs and lagging pricing actions. He now expects adjusted earnings per share growth in 2021 to be in the lower end of his previously issued 6-8% range. The company expects adjusted operating margin to increase by 70 basis points now from the 80 basis points previously anticipated.
That said, the benefits mentioned above are likely to help this developer, manufacturer and distributor of household, personal care and specialty products continue to grow. Zacks Rank # 3 (Hold) shares have gained 6.2% in the past six months compared to industry growth of 1.3%.
3 choices of sturdy commodities
J&J Snack Foods (JJSF – Free Report) currently sports a No.1 Zacks (strong buy) rank, and its bottom line has far exceeded Zacks’ consensus estimate over the previous four quarters, on average. You can see The full list of today’s Zacks # 1 Rank stocks here.
Sysco Company (SYY – Free Report), currently carrying a Zacks Rank # 2 (Buy), has a surprise four-quarter profit of 13.3%, on average.
Medifast (MEAN – Free Report), with a Zacks Rank # 2, has a surprise earnings surprise over the last four quarters of around 16%, on average.