It was just yesterday when we discussed that amid a record surge of mentions of "inflatiion" on corporate earnings calls, which according to BofA calculations soared by a mindblowing 1,100% Y/Y to a record high...
... that it was just a matter of time before this quarter's record profit margins - which were only possible thanks to trillions in stimmy checks which allowed companies to pass through surging commodity costs into higher prices without much if any pushback - slump resulting in a far uglier corporate profitability picture in coming quarters.
We didn't have long to wait for the confirmation: this morning Clorox shares crashed as much as 11% after reporting net sales and adjusted earnings per share for the fourth quarter that missed even the lowest analyst estimate. Worse, the company forecast a decline in 2022 sales as pandemic-fueled demand for its cleaning products wanes while sticky commodity prices eat into its margins.
The maker of bleach and Glad trash bags posted sales of $1.8 billion in the company’s fiscal fourth quarter - lower than investors’ expectations - and the clear result of a collapse in demand amid surging prices. And a testament to just how "transitory" inflation will be, for the current fiscal year, which began in July, the company expects organic sales to decline by 2% to 6%. It sure looks like at least one company sees soaring prices as quite non-transitory.
As Bloomberg notes, "Clorox’s guidance is a caution to investors about the road ahead for consumer-products companies that enjoyed a boom during the onset of the pandemic. The new forecast comes as consumers’ priorities shift and many spend less time at home."
To this we will add that it's not just consumer-products but any company that has been quietly rising prices in what is now obviously a galloping inflation environment. And the price plunge is the direct result of what happens when consumers suddenly find they can no longer afford bleach that has soared in price.
Furthermore, just as we warned, the rising cost of freight and raw materials represents another challenge. Clorox said its gross margin for the fourth quarter imploded by 9.7% to just 37.1% on soaring manufacturing and logistics costs.
Wells Fargo analyst Chris Carey agreed with this dour take writing that "we’ve been arguing that sell-side estimates were far too high and CLX needed a reset on FY22 estimates before investors could become more constructive... the reset came, but it’s a far bigger cut than was contemplated by most."
Carey's next statement is something which central bankers everywhere should heed: warnings about “generational inflation and unpredictable” product demand, the Wells analyst warned that there is a growing need to be conservative, adding that CLX set an outlook it believes it can hit. But the fiscal 2022 forecast is probably way below most, if not all, investor models, and “low visibility on near/medium-term delivery would certainly be a key takeaway this morning,” the analyst notes.
And the punchline: as Carey concluded, this may be the start of the “bad news out,” debate likely turns to visibility into fiscal 2022 with a forecast that implies a significant second- half improvement.
Sure enough, the market reaction implies a stock multiple “reversion” is already starting to occur, first at Clorox and soon at every other company that passed through higher prices and suddenly faces a collapse in demand.
Which leads us to the following pesky dilemma facing Powell: do nothing and watch as profit margins disintegrate or taper and watch multiples collapse as rates rise.