The dietary supplements industry is one that is “obviously growth accretive, but it’s a very fragmented category with no clear leader,” described financial analyst Olivia Tong of Bank of America Merril Lynch during Clorox’s Q3 earnings call yesterday. (Click HERE to read the full transcript on Seekingalpha.com)
Clorox CEO and chairman Benno O. Dorer agreed with her illustration of the industry, adding that that was exactly why the company went ahead with the purchase of dietary supplement portfolio company Nutranext in March. Brands that will soon belong to Clorox from this acquisition include collagen specialist NeoCell and multivitamin maker Rainbow Light.
“As you know, we like fragmented categories with no clear leader. We feel like this meets all the criteria of a solid acquisition that we've frankly been emphasizing for years,” Dorer said.
“It's bolt-on in nature. It's US-centric. It's in the health and wellness space which, of course, we know well and have expanded into more specifically as it relates to vitamins, minerals and supplements with Renew Life [which it bought in 2016]. It's a really solid fit with our capabilities and it's profitable and growing.”
Will expansion into supplements give Clorox a new cyclicality?
Analyst Lauren Lieberman from Barclays Capital asked if Clorox’s investment in the supplement category would bring a new level of cyclicality to the business that wouldn’t exist otherwise.
“I feel like it's a business where it was on trend for several years and then there's some journal article that tells people it doesn't work, or whatever it is, and then there's a falloff and then it comes back,” she said.
Dorer explained that he has confidence in the scientific soundness of the categories of Nutranext’s supplements. He described the brands as “number one brands in differentiated niches.”
“If I mention two of the major brands that we bought, one is around anti-stress and sleep and that has a lot to do with magnesium levels,” he said. “If you Google that and if you do a research, there's a lot of scientific research out there. One of their brands, NeoCell, is a leader in collagens. Again, a lot of research out there.”
In general, Dorer said he was “very confident about our capabilities in the area and very bullish about Nutranext.”
Coming up next for Nutranext
As a third of brands under Nutranext were direct-to-consumer, he added that the company’s near-term focus will be to invest in more marketing, R&D, sales, and increase product supply before expanding distribution in brick-and-mortar and e-commerce.
Under Clorox’s wing, there’s also potential for some of these US-centric brands to go international, he said.
“We love that we're in differentiated segments here, emerging segments, not single letter vitamins, but product benefits that are scientifically grounded and that start to have a really strong following among consumers,” he added.
Nutranext products expected to make up 3% of Clorox’s sales
The company adjusted their fiscal year 2018 outlook to account for Nutranext. Clorox CFO Kevin Jacobsen reported that the company now expects fiscal year sales to grow by 3% versus the previously forecasted 1% to 3%.
Gross margin for the full year is projected to go down by 100 to 150 basis points because of one-time charges related to the acquisition.
“We strongly believe the Nutranext acquisition brings significant breadth to our dietary supplements offerings,” he said. “Ongoing, we anticipate Nutranext to represent more than 3% of company sales.”
“Importantly, we continue to anticipate Nutranext to be accretive to earnings per share in fiscal year 2020,” he added.