Clorox Shares Plummet on Sales Warning

Clorox Co. shares fell 16% on Thursday after the largest U.S. maker of bleach warned that lower sales at its recently acquired First Brands business will hurt profit the next two quarters.

Clorox shares plunged $16.81 to close at $86.44 on the New York Stock Exchange, the biggest one-day drop in at least 19 years, and sank to its lowest level since October.

Investors had expected Chairman Craig Sullivan to quickly turn around First Brands, just as he had done with more than two dozen smaller acquisitions. Sales, though, are falling more than forecast as Clorox tries to clear out excess inventories of First Brands’ products such as Glad bags and STP auto products.

Because of Clorox’s canny strategy of reformulating veteran brands, international expansion and aggressive acquisitions, investors had become accustomed to the Oakland-based company’s growth and stock price, which have surged for several years running.

Before Thursday, Clorox’s stock had generated a sizzling total return (price gains plus dividends) of 364% in the last five years--that’s an average of 36% a year--against the 210% return of the bellwether Standard & Poor’s 500 index.

“Everybody is blindsided,” said Robert Izmirlian, analyst with Standard & Poor’s Corp. “What a bomb.” He lowered his rating on Clorox to “hold” from “accumulate.”

Clorox bought First Brands in January for about $2 billion, the biggest acquisition in the company’s 86-year history.

Before the purchase, First Brands heavily discounted its products, which also include Scoop Away and Jonny Cat litter. That left retailers with about $125 million in surplus inventory.

Clorox also cut back on big discounts for those goods to try to boost its profit. That led to a surprise 2.6% drop in fiscal fourth-quarter sales and will lead to lower-than-expected sales for the first half of fiscal 2000.

Profit will also be reduced by higher plastic costs--a problem for First Brands’ Glad bags for the last two years--as well as increased spending by Clorox to develop new products.

“About 90% of the shortfall has to do with prior management of First Brands’ practices, not current management’s execution,” said William Steele, a Banc of America Securities analyst, who reiterated a “buy” rating.

Clorox shares have fallen by about a third from a peak of $132.94 in February, reducing their value by $5.5 billion.

“They’ve swallowed a merger that has hurt in the short term,” said money manager L. Roy Papp, chairman of L. Roy Papp & Associates, which owns 351,000 shares.

Also Thursday, Clorox reported that fiscal fourth-quarter sales fell 2.6% to $1.1 billion. Analysts had expected a 1% to 2% increase for the quarter ended June 30.

Sales of some Clorox products such as Brita water filters and Combat insecticides were also less than forecast.

The sales drop overshadowed a 5.8% rise in earnings for the fourth quarter. Profit from operations rose to $115.3 million, or 96 cents a share, from net income of $109 million, or 91 cents, a year earlier. It matched the average forecast of analysts surveyed by First Call Corp. The year-ago results were restated to include those of First Brands.

Clorox has reduced costs by combining First Brands’ headquarters with its own and firing workers in duplicate jobs. Meshing the companies is progressing better than expected, Sullivan said.

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Wrung Out

Before Thursday’s bruising 16% loss, Clorox’s stock generated a total average return of 36% a year in the past five years. Monthly closes and latest since January 1996:

Thursday: $86.44, down $16.81

Source: Bloomberg News