Clorox's 2026 Q1 Earnings Call: ERP Transition Sparks Contradictions on Inventory, Sales, and Growth Expectations

Guidance:

• Fiscal-year organic sales guidance: decline of -5% to -9%; management expects to be at the lower end of the range.
• ERP transition impact: estimated 7.5 points of incremental shipment shift/headwind to sales.
• Excluding ERP, front half organic sales: negative low single digits; back half: positive low single digits.
• U.S. retail category assumption: roughly 0% to +1% growth.
• Inflation/read-through: input-cost/inflation now ~+$70M (vs prior ~$90M); tariffs ~+$40M headwind.
• Gross margin: pressured by ERP costs and higher trade/advertising now, but expecting robust expansion in Q3–Q4.
• Price/mix: ~1-point headwind embedded for the year.
• ERP EPS benefit: ~$0.90 expected to flow into run-rate.

Business Commentary:

* New ERP System Launch: - The Clorox Company successfully launched its new ERP system in the U.S. in Q1, which was a significant step in their transformation journey. - While the transition presented some challenges, the company is already seeing benefits ramp up across operations. - The ERP system is expected to enhance digital operations, improve demand planning, and enable faster execution.

• Organic Sales Growth Outlook:
• For fiscal year 2026, Clorox anticipates that organic sales growth in the front half of the year will be in negative low single digits, while the back half is expected to be positive low single digits.
• The assumptions around category growth remain muted, with the U.S. retail category projected to grow 0% to 1%.

• Growth is expected to be driven by improvements in consumption and market share, with new innovations and lapping negative trends from the previous year.

• Consumer Behavior and Promotional Activity:

• Consumers continue to be cautious and value-seeking, leading to increased promotional activity in categories like trash bags and cat litter.
• Private label consumption has not seen material inroads, though some categories like Brita and Bleach are being watched closely.

• Clorox is responding by ensuring it offers value across different segments and adjusting its price pack architecture to capture consumer needs.

• Gross Margin and Cost Management:

• Clorox revised its full-year outlook for input cost and inflation to a $70 million increase, $20 million more favorable than initially expected.
• Tariffs remain a $40 million headwind, but the company anticipates robust gross margin expansion in both Q3 and Q4.
• Incremental expenses from ERP demand fulfillment and additional trade spending are offsetting some benefits from favorable inflation expectations.

Sentiment Analysis:

Overall Tone: Neutral

• Management called the ERP a “major milestone” and said “we're already seeing the benefits ramp up” and that teams are “optimistic,” but also stated “we're not satisfied right now” on share trends and expect to be at the lower end of guidance — balancing cautious tone with measured confidence in execution and back-half recovery.

Q&A:

• Question from Peter Grom (UBS): Can you explain the organic sales cadence across Q2 and the balance of the year; what category-growth assumptions are embedded and what gives you confidence consumption and sales will inflect in the back half?
  Response: Excluding ERP, front half = negative low-single-digit organic sales, back half = positive low-single-digit; U.S. retail category assumed 0–1%; back-half improvement driven by new innovations, demand-creation and lapping prior negative trends to regain market share.

• Question from Peter Grom (UBS): On Q2 consumption — what have you seen through October and are you embedding any improvement versus Q1?
  Response: October split: early-month comps hurt by storms/port issues, second half rebounded; expect recent rebound rate to continue, implying low-single-digit consumption declines in Q2.

• Question from Andrea Teixeira (JPMorgan): How has the promotional/competitive environment evolved through October and what price-pack architecture is embedded in back-half innovation?
  Response: Competitive activity is higher in certain categories (trash, litter) but overall rational; management will use price-pack architecture across innovations (e.g., Hidden Valley, Brita, litter) to meet value-seeking consumers at multiple price points.

• Question from Andrea Teixeira (JPMorgan): Any change in commodity/cost outlook that could allow gross margin to land above guided range?
  Response: Input-cost inflation now projected at ~$70M (vs prior ~$90M, ~$20M favorable); tariffs remain ~$40M headwind; ERP-related incremental expenses plus higher trade/advertising push margin toward low end, though Q3–Q4 margin expansion is expected.

• Question from Kaumil Gajrawala (Jefferies): Where do shares stand given ERP/shipments noise and do you have infrastructure clearance to pursue demand-creation?
  Response: Q1 organic sales excluding ERP declined ~3 pts; after removing +1 pt timing and ~3 pts out-of-stock headwind, underlying performance was ~-1; ERP caused greater-than-expected share loss (notably August) but inventories are rebuilding and they have capacity/ plans to pursue demand-creation to recover share.

• Question from Filippo Falorni (Citi): Can you give color on back-half innovations and specifics for challenged categories like trash bags and cat litter?
  Response: Innovation across major brands (Glad scent extensions, Brita smaller sizes/colors, Burt's expanded formats) with price-pack elements; trash and litter are highly promotional — they're being surgical on investments in Glad and will deploy targeted litter initiatives in back half to regain share.

• Question from Filippo Falorni (Citi): How sustained can the promotional environment remain in trash bags and litter?
  Response: Promotional intensity is high and as expected; Q1 ERP amplified share declines but shares are rebounding as in-stock; management will limit value-destroying promo, invest selectively for long-term value and execute litter fixes in back half.

• Question from Christopher Carey (Wells Fargo): How have back-half spending plans evolved — funded by commodity savings or broader activities; how do you balance promo vs advertising?
  Response: They sharpened spend allocation toward high-ROI activities (retail media, targeted advertising, merchandising) using real-time retailer/consumer insights; initiatives funded by efficiencies and clearer distribution, with units empowered to adjust as they learn.

• Question from Christopher Carey (Wells Fargo): Given balance sheet and volatility, how are you thinking about portfolio actions going forward?
  Response: Long-term disciplined portfolio focus: strengthen core brands, pursue value-creating divestitures/tuck-ins as appropriate; Board continually evaluates options and balance sheet provides flexibility, but they will not chase short-term disruptions.

• Question from Anna Lizzul (BofA): Are you seeing retailer destocking and how are you addressing club/online exposure (e.g., Glad in club)?
  Response: Not seeing material destocking; ERP period was rebuilding inventories and those are largely recovered; strong club presence overall and they are working to improve Glad's club position with tailored innovations and pack formats.

• Question from Anna Lizzul (BofA): Thoughts on private label gains (wipes/Brita) versus branded performance?
  Response: Aggregate private-label share gains are limited; they are monitoring Brita (some trade-down to private label and smaller filters) and Bleach upticks; responding with appropriate pitcher/filter lineups and value offerings.

• Question from Bonnie Herzog (Goldman): Can you unpack the -5% to -9% organic guidance and inventory unwind; is the high end achievable and was the inventory unwind larger than expected?
  Response: Inventory positioning is solid and ERP shipment shift refined to 7.5 pts; high end of guidance requires all favorable conditions (stronger category growth, flawless innovation execution, no supply issues); management currently expects to land nearer the lower end.

• Question from Olivia Tong Cheang (Raymond James): Why are you confident category growth has stabilized (0–1%) and will that improve or rely on your actions?
  Response: Categories are essential with a floor; recent quarters have been in 0–1% range (Q1 flat excluding small categories); stabilization reflects consumer behavior and category dynamics, but management expects to further support growth via innovation and execution.

• Question from Olivia Tong Cheang (Raymond James): Is ERP disruption fully behind you or could effects extend past Q2?
  Response: Major ERP implementation work is complete; remaining smaller rollouts expected non-disruptive; inventories largely rebuilt and focus shifts to using ERP for visibility, demand planning, efficiencies and faster execution.

• Question from Robert Moskow (TD Cowen): Are customer fill rates back to normal and is there a path for price/mix to inflect positive after three quarters of negative price/mix?
  Response: Customer fill rates largely restored and inventories rebuilt (professional channel slower); price/mix remains a headwind but reduced versus last year — outlook embeds ~1-point negative for the year driven by value-seeking and channel shifts.

• Question from Kevin Grundy (BNP Paribas): How should we think about run-rate EPS (add back ERP) and are investment levels adequate or might they need to rise?
  Response: Management still views the ~$0.90 ERP benefit as add-back to run-rate and remains comfortable with current investment levels aimed at long-term value creation; they expect to apply ERP benefits to future EPS baseline.

Contradiction Point 1

ERP Transition and Inventory Impact

It involves the impact of the ERP transition on inventory levels and sales growth, which are critical aspects for managing business operations and financial performance.

Can you clarify the negative organic sales guidance range and the inventory unwind? - Bonnie Herzog (Goldman Sachs Group)

2026Q1: Good inventory position with retailers post-ERP. - Luc Bellet(CFO)

What is the impact of the ERP transition and whether pull-forward demand creates an additional negative impact beyond it? - Andrea Faria Teixeira (JPMorgan Chase & Co)

2025Q4: We shipped 2 weeks of inventory, which affected sales growth. - Luc Bellet(CFO)

Contradiction Point 2

Customer Fill Rates and Order Fulfillment Recovery

It affects the company's ability to fulfill customer orders and meet demand, which impacts operational efficiency and customer satisfaction.

Have customer fill rates returned to normal, and is there potential for price/mix improvement? - Robert Moskow (TD Cowen)

2026Q1: Customer order fulfillment recovered but small issues in professional segment. - Linda Rendle(CEO)

Can you provide details on the ERP transition's impact and whether pull-forward demand adds further negative impact beyond the ERP? - Andrea Faria Teixeira (JPMorgan Chase & Co)

2025Q4: These ERP implementation issues have caused delays in virtually every area, especially shipments to our customers - Linda J. Rendle(CEO)

Contradiction Point 3

Category Growth Expectations

It involves the company's expectations for category growth, which can significantly impact sales projections and investor expectations.

What's driving confidence in stabilized category growth, and will ERP cause disruptions beyond Q2? - Olivia Tong(Cheang) (Raymond James & Associates, Inc., Research Division)

2026Q1: Category growth stable at 0-1%, driven by essential nature of categories and strategic investments. - Linda Rendle(CEO)

How should we view the long-term organic sales opportunity as we exit fiscal 2025 and enter 2026 with categories remaining soft? - Filippo Falorni(Citi)

2025Q3: Our 3-5% growth algorithm is predicated on normal category growth returning. - Linda Rendle(CEO)

Contradiction Point 4

Impact of ERP Transition on Sales

It highlights differing explanations of how the ERP transition will affect sales, which is crucial for understanding the company's operational challenges and financial performance.

Can you explain organic sales growth for Q2 and the remainder of the year? What factors drive confidence in future trend improvements compared to current performance? - Peter Grom(UBS Investment Bank, Research Division)

2026Q1: Q1 organic sales excluding ERP impact declined about 3 points, about 1 (point) due to timing shifts and out-of-stock impacts. - Luc Bellet(CFO)

Is the Q4 organic sales guidance of -4% correct? Why does it seem low given the easier year-over-year comparison? - J Javier Escalante Manzo(Evercore ISI)

2025Q3: The guidance considers the ERP transition, providing about a 3% positive impact. - Luc Bellet(CFO)

Contradiction Point 5

ERP Transition Impact on Sales Growth

It involves differing expectations regarding the impacts of the ERP transition on sales growth, which is a critical metric for investors.

Can you clarify the organic sales rhythm for Q2 and the remainder of the year? What factors support confidence in changing trends compared to current data? - Peter Grom(UBS Investment Bank, Research Division)

2026Q1: We are confident that we'll achieve our target of returning the ERP system to full functionality by year-end. - Linda Rendle(CEO)

Can you update us on gross margin expansion beyond fiscal 2025? What are the long-term drivers post-2025? - Dara Mohsenian(Morgan Stanley)

2025Q2: We're confident we can fully rebuild gross margins to 44% this year. - Kevin Jacobsen(CFO)