The Clorox Co. (CLX) yesterday announced the closure of its Venezuela operations with immediate effect as its business in the country has become unprofitable. The company stated that the business of its affiliate Corporacion Clorox de Venezuela S.A. or Clorox Venezuela will now be reported as discontinued operations and its assets will be sold in due course.
The investor community applauded Clorox’s move to exit the Venezuelan market as reflected from a 7.35% rise in the company’s share price. During the trading hours yesterday, the company’s shares soared to reach a new 52-week high of $98.31 before closing at $97.23.
Coming back to Clorox’s pull out from Venezuela, the company reached this decision after toiling for around three years amid frozen prices fixed by the Venezuelan government for over two-third of its products. The situation worsened as the company faced a triple-digit inflation which resulted in significant increases in its input costs. This meant selling its products at a loss and in turn reporting continued operating losses in the income statement.
Though the company tried to overcome this situation by repeatedly approaching government officials to put across the plight of its business, asking for instant and ongoing price increases and other critical remedial actions, its efforts were not recognized. The price increases that followed the situation were not sufficient to pull the company out of losses.
However, Clorox’s put forth that closing of the Venezuelan business will not have any impact on its other international businesses. Further, the company retained its financial outlook for fiscal 2015, projecting flat sales and earnings of about $4.35—$4.50 per share.
In relation to the closing of its Venezuela operations, the company expects to record after-tax exit costs of $60 million to $65 million, or 46 cents to 50 cents per share in discontinued operations impacting earnings per share. Additionally, the company expects to record about $10 million to $15 million as after-tax exit costs under discontinued operations over the next three years. Moreover, cash-related exit costs, net of tax benefits, are projected to be $ 5 million to $10 million.
Clorox had started its operations in Venezuela in 1990 with the distribution of the Pine-Sol brand. The company’s business there has grown since, through acquisition of a host of brands including Mistolín cleaners, the Nevex, Bon Bril, Marlene and Lustrillo. The company’s assets in the country include two administrative offices in Caracas and three manufacturing facilities, of which two are located in Santa Lucia and the third one is situated in Guacara. Currently, Clorox Venezuela accounts for nearly 1.4% of the company’s total sales.
We believe the sale of Clorox’s Venezuelan operations is going to prove advantageous for the company given the miserable economic situation in the country. This will undoubtedly benefit the company’s bottom line results.
Clorox is not the only company affected by Venezuelan currency devaluation. Other companies struggling with its operations in the country amid price freeze and increased costs include Colgate-Palmolive Co. (CL) and Avon Products Inc. (AVP). Nike Inc. (NKE) too remains exposed to the recent currency devaluation in developing markets. Clorox currently carries a Zacks Rank #3 (Hold).
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