Clorox (NYSE: CLX) is a highly respected consumer staples company with a stable of iconic brands. It is always looking for new and innovative ways to expand its portfolio, which often includes buying other companies. Although this has worked out well for Clorox (Burt’s Bees, for example), it doesn’t always pan out as expected. The vitamins business looks like it might be a misstep. Here are three things investors need to know.
1. Clorox is refocusing its vitamins unit
Clorox built up its vitamin business through a series of acquisitions. The idea was basically to cobble together a collection of brands to create a more formidable single player. It wasn’t a bad plan, considering that consumer health has been a fairly attractive segment of the consumer staples space.
For a little while, the company appeared to be gaining traction. But that didn’t last, and sales began to slow. In response, the company decided to reposition the business. Effectively, management announced that it was going to place a greater emphasis on its best products and brands in the vitamin space. The company also took a one-time charge in the fiscal third quarter of 2023 to write down the carrying value of the business.
Both moves hint that Clorox is rethinking its commitment to vitamins. Charges are often taken before a company sells an underperforming unit if it thinks a sale will bring in less than the carrying value of the division. And refocusing on the best brands is a way to spruce up performance in an effort to get the best price possible in a sale.
2. Vitamins just shifted to a different segment
When Clorox reported fourth-quarter 2023 earnings, management noted almost as an afterthought:
Lastly, a few housekeeping items to keep in mind. As a result of the strategy change announced in the third quarter of fiscal year 2023 for VMS and updated financial expectations, the VMS business is no longer included within the Health and Wellness reportable segment. It’s now included within Corporate and Other.
If Clorox were looking to retain the vitamins business, which it calls VMS, it might move it into the Corporate and Other category to better facilitate a revamp. Basically, it could be an effort to put the division under the microscope to ensure a quicker fix.
However, this shift is also what a company would do if it was looking to sell the division. Essentially, pushing it into Corporate and Other allows the group to be financially extracted from other divisions and more easily sold. The latter seems more likely than the former, given the company’s recent moves.
3. Not every business idea works
In fiscal Q3 2023, it started to look like Clorox wanted to exit vitamins, with the writedown and the focus on just key products to dress up performance. The Q4 shift into Corporate and Other seems like it cements the deal. Getting into the vitamins business was a good idea that just didn’t work out as planned for Clorox. To put it simply, management made a costly mistake.
But even good companies make mistakes, and investors should look at the long-term track record at Clorox before taking too dour a view. Notably, the company has increased its dividend annually for 46 consecutive years. You don’t achieve a record like that without doing something right along the way.
And while vitamins didn’t play out as hoped, the company has leading brands in most of the categories in which it competes, from cleaning products to cat litter to garbage bags. In other words, the business foundation remains strong, and it can easily weather what looks like a vitamin misstep.
Clorox is turning things around
In some ways vitamins is a minor issue for Clorox today, given the margin crunch the overall business experienced after the coronavirus pandemic hit. And yet, getting out from under a struggling business unit could help the company achieve its promise of returning margins back to pre-pandemic levels. Management has already made a good deal of progress here, with gross margin up 360 basis points in fiscal 2023.
With the recent moves management has been making in the vitamins business, it seems increasingly likely that selling this division could be another step in the larger turnaround effort.
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Reuben Gregg Brewer has positions in Clorox. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.