Jefferies & Co.
GIVEN THE RECENT SHARP reversal in core costs, which have gone from being up 18% last September to having been down over 30% for the past four months, all the while alongside a very buoyant core-pricing environment, we continue to believe that our [Consumer] Group should be, by and large, in a gross margin "sweet spot."
Last week, we took a look at the recent second-quarter performance of our calendar-based direct sellers, which tend to be less impacted by input-cost volatility. This week, we thought we would review the gross-margin performance of our Business-to-Business (B2B) companies in the most recent quarter in order to see how things played out given the continued favorable price/cost dynamic.
Despite significant easing of commodity-cost pressures in the past few months, just six of the 10 B2B companies improved gross margin over the prior-year quarter, consistent with recent trends. The six gainers saw average gross-margin expansion of 390 basis points, an improvement from the 320 basis-points average expansion enjoyed by these companies last quarter, while those companies seeing contraction nevertheless saw improvement of their own, going from down roughly 390 basis points last quarter to down 220 basis points this quarter.
The same companies that led the way last quarter -- Central European Distribution (ticker: CEDC), Church & Dwight /zigman2/quotes/203816376/composite CHD +0.32% (CHD) and Clorox /zigman2/quotes/206443229/composite CLX +1.29% (CLX) -- did so again this time around.
Central European achieved 850 basis points of gross-margin expansion due primarily to the first-time consolidation of the activity of the Russian Alcohol Group, which as a producer has a favorable margin profile. Central European also continued to benefit from persisting improvement in raw spirit pricing and rationalization of some low-margin distribution business.
Church & Dwight saw sharp gross margin [gains] again in the June quarter, up 500 basis points after increasing 320 basis points in the March quarter, again benefiting from pricing, favorable trends in commodity-cost inputs, liquid-laundry compaction and the integration of last year's Orajel acquisition, as well as other cost-savings measures.
After seeing its first year-over-year gross-margin expansion since June 2007 in the March quarter, Clorox enjoyed a similar expansion in June (up 350 basis points), also due to pricing, improved commodity costs and other cost-savings initiatives. For Church & Dwight and Clorox, it remains to be seen just how well pricing will hold in the face of the swift deflation in commodity costs.
Our lawn and garden companies, Central Garden & Pet /zigman2/quotes/207636516/composite CENT +1.43% (CENT) and Scotts Miracle-Gro /zigman2/quotes/200553749/composite SMG -0.34% (SMG), also once again posted gross margin increases.
Similarly to Clorox, Central Garden had not seen gross-margin expansion since 2007 prior to the March quarter, and after a 70 basis-points expansion then, Central Garden spiked to a 320 basis-points expansion in June on improved pricing in wild bird food, lower input costs and mix shift toward higher-margin chemical and control products.
Scotts (up 210 basis points) also saw sequential improvement from March (up 150 basis points) as it, too, benefits from significant pricing action and the deflation of certain inputs, particularly urea.
Meanwhile, our more-cyclical consumer-durables names continued to see significant gross-margin pressure. Helen of Troy /zigman2/quotes/205565021/composite HELE -0.39% (HELE) saw the greatest contraction, down 280 basis points, while Lifetime Brands /zigman2/quotes/202777463/composite LCUT -1.49% (LCUT) also saw greater than 200 basis-points contraction, as each company continues to work through higher-cost inventories (with Lifetime Brands more aggressively targeting inventory reduction). With longer long lead times given Asian sourcing, easing commodity costs will take longer to impact their respective profit-and-loss statements.
Libbey [traded over the counter] saw gross-margin contraction of 120 basis points, though was much better than the over-800-basis-point decline in March.
While Chattem (CHTT) generally enjoys high gross margins, they saw 250 basis points of contraction in May. While certain input costs have risen, Chattem is also impacted by an accounting function that treats certain promotional activity as a reduction in net sales, which empirically reduces gross margin as well.
--Douglas M. Lane <BREAK /> --Per E. Ostlund <BREAK /> --Andrew M. Tseng
To be considered for the Soapbox feature, please submit an original article of less than 1,000 words to email@example.com with "Soapbox Submission" in the headline. Please include your daytime telephone number and credentials .
The opinions contained in Investors' Soapbox in no way represent those of Barron's Online or Dow Jones & Company, Inc. The opinions expressed are those of the newsletter's writer(s).
Comments? E-mail us at firstname.lastname@example.org