Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Is Clorox Making Money?

Mr. Market still values iconic American consumer brands. For instance, shares of the Clorox Co. (NYSE: CLX) were trading at $152.50 on 7 October 2019.

Clorox manufactures a variety of cleaning products, including America’s best-known brand of bleach. Other Clorox Co. products include; Kingsford Charcoal, Glad bags, Liquid Plumber, Pine Sol, Brita Water Filters, Rainbow Light vitamins, Fresh Step cat litter, and Hidden Valley Ranch salad dressings

Why does Mr. Market like this old consumer products company? Notably, dollar stores sell many of Clorox’s products in the United States.

Is the Clorox Co. Making Money?

Currently, Clorox makes a little money from its chemicals. Clorox reported quarterly venues of $1.627 billion and a quarterly gross profit of $734 million on 30 June 2019.

Plus, Clorox reported an operating income of $317 million and a net income of $241 million for the quarter ending in June 2019. However, Clorox’s revenues could soon drop.

The Clorox Company’s revenue growth fell by 3.78% during the quarter ending on 30 June 2019, Stockrow estimates. That was the first quarter of negative revenue growth at Clorox in a few years.

Clorox reported an operating cash flow of $389 million and a free cash flow of $318 million on 30 June 2019. Thus, Clorox generates some cash from its business.

Can Clorox Compete with Amazon?

Unfortunately, Clorox keeps little cash. Clorox reported cash and equivalents of $111 million on 30 June 2019. Personally, I think this is too low a margin of safety for a consumer products company in today’s world.

To explain, I think Amazon (NASDAQ: AMZN) has raised the bar on margins of safety in consumer products. Moreover, Amazon is becoming America’s favorite retailer of consumer products through Prime and Amazon Pantry. Notably, Statista estimates Prime had 105 million U.S. customers in June 2019, up from 95 million in June 2018.

For example, I found dozens of Clorox products for sale on Amazon on 5 October 2019. Those products included a three-pack of 121-ounce jugs of Clorox bleach for $12.97. Plus, I think Amazon could become Clorox’s most dangerous competitor if it starts selling a private label Amazon bleach.

How Amazon Threatens Clorox’s Survival

Meanwhile, Amazon reported $41.463 billion in cash and short-term investments on 30 June 2019. Hence, Amazon’s margin of safety is over 99 times larger than Clorox’s.

Therefore, Amazon could take no risk by competing directly with Clorox. On the other hand, the risk of competing directly with Amazon is too great for Clorox.

I believe this situation threatens Clorox’s survival in three ways. First, Amazon can easily afford to compete directly with Clorox with private label brands.

I believe this situation threatens Clorox’s survival in three ways. First, Amazon can easily afford to compete directly with Clorox with private label brands.

Third, Amazon can drive other retailers out of business and restrict the market. Hence, Clorox will have no choice but to pay Amazon’s price. For instance, Amazon can offer free delivery on cleaning products which eliminates the need to go to the dollar store or the big box and shop.

Amazon is Coming for Clorox

Notably, shopping at the dollar and big box stores is not usually a pleasant experience. Amazon offers the alternative of staying home and watching the game; or playing League of Legends, instead of shopping at the dollar store. Guess what most Americans will choose?

Clorox faces this situation now, because CNBC reports Amazon plans to spend $800 million to upgrade Prime Delivery. In particular, Amazon plans to buy 100,000 electric delivery vans from Rivian over the next decade, The Verge reveals.

I think consumer brands makers like Clorox will have difficulty time making money when the Amazon van becomes a fixture in your neighborhood. The worst-case scenario could be one retailer for most Clorox products: Amazon.

The Value Case for Clorox

There is an interesting value-investment argument for Clorox. Clorox is a boring company, and it makes a product Silicon Valley has no interest in.

Conversely, Amazon is interested in basic consumer products in a big way. Thus Clorox faces the potential of fierce competition and massive industry disruption.

Yet Clorox can tap a vast retail footprint in the United States. Statista estimates there were 30,500 dollar stores in the United States in 2016. Plus Statista forecasts the number of dollar stores in the United States could grow to 38,000 by 2021.

Unfortunately, nobody knows if those dollar stores can survive direct competition with Amazon. My suspicion is that dollar store operators lack the financial resources to compete with Amazon.

How Dollar Stores Threaten Clorox

For instance, Dollar Tree (NASDAQ: DLTR) had just $648.3 million in cash and equivalents on 3 August 2019. Meanwhile, Dollar General (NYSE: DG) had only $259.57 million in cash and equivalents on 2 August 2019. In contrast, Amazon had $41.463 billion in cash and short-term investments on 30 June 2019.

Hence, I believe either dollar store operator could collapse fast because those companies have little money. Statista estimates Dollar Tree alone operated 15,237 stores on 2 February 2019. I have to wonder how Dollar Tree can operate that many locations with no cash reserves.

Plus, Dollar General operated 15,370 stores in America in 2018 up from 14,534, Statista estimates. Dollar General is expanding fast, and it had just $259.57 million in the bank on 2 August 2019. I think Dollar General could run out of cash and collapse overnight in the retail death spiral.

What happens to Clorox if one of its largest retailers collapses instantly? If Dollar General, or Dollar Tree, falls into the death spiral it could drag Clorox down with it.  

To clarify, the death spiral occurs when a retailer runs out of cash and cannot pay creditors or suppliers. Overbuilt retailers often face the death spiral. I think both Dollar General and Dollar Tree are building more stores than the economy can support.

Is Clorox a Good Dividend Stock?

Clorox (NYSE: CLX) has historically been a good dividend stock. For instance, credits Clorox with 41 years of dividend growth.

Clorox paid a great quarterly dividend of $1.06 on 30 July 2019. Impressively that dividend grew by 10₵ in summer 2019, rising from 96₵ on 23 April 2019.

Overall, Clorox offered a dividend yield of 2.8%, an annualized payout of $4.24, and a payout ratio of 66.1% on 4 October 2019. Thus, Clorox is a good dividend stock but I am leery of it.

Clorox is a Value Trap

I advise investors to stay from Clorox because this company is in a very dangerous place. Amazon’s disruption of America retail could soon make it hard for Clorox to make money.

Therefore, Clorox is a value trap you need to avoid. I define a value trap as a stock that meets some value criteria but no cash. Hence, that stock could succumb to the death spiral. The death spiral occurs when a company does not generate enough cash to pay its debts.

Given that possibility, Mr. Market overpriced Clorox at $152.50 on 7 October 2019. I expect Clorox’s share price could fall dramatically over the next years. Thus, investors who want a steady income need to stay away from Clorox.