What the shift means largely depends on how one interprets the numbers. Clorox earnings for the quarter were $109 million, up 22% or $20 million. That profit increase is pretty close to the $16 million ad expense cut. Analysts and investors frown on companies cutting ad spending to make earnings numbers.
Clorox executives would prefer to view this as a shift from advertising-reported as an expense-to trade promotion, which under accounting rules adopted three years ago appears as a reduction of sales.
CEO Jerry Johnston last year indicated Clorox would shift spending from advertising to promotion on Clorox bleach and Kingsford Charcoal-brands that its marketing mix analysis indicated would benefit from more promotion and less advertising.
Compounding the ad expense cut last quarter, Mr. Johnston told analysts and investors in a conference call earlier this month, was a shift in production expenses originally expected to be taken in the fiscal second quarter, ended Dec. 31, into the fiscal third quarter. Deutsche Bank analyst Andrew Shore estimated $6 million of the $16 million ad expense reduction came from production expenses shifted into the fiscal third quarter.
A Clorox spokesman said the shift in production costs between quarters related to a production delay for ads; Clorox expenses ad production as it's done, he said, rather than when ads first run.
"You have to look at [the ad numbers] in the context of the entire advertising budget," Mr. Johnston said. "Our Glad advertising in the quarter was up substantially [primarily behind Glad Press `n Seal wrap]. The real changes in the advertising came in the laundry and home care business, which went down, and a good portion of that came in the shift [between] trade spending and media in the bleach business."Omnicom Group's DDB Worldwide, San Francisco, handles all Clorox brands, including Glad, Brita, Pine Sol and Hidden Valley Ranch.
At 9.3% of sales, Clorox's ad spending last quarter was below its target of 10%, but "remains at the upper end of our peer group," said Steve Austenfeld, director-investor relations.
"The ad spending number was a little surprising," said Joe Altobello, analyst with CIBC World Markets. "But I think it just happens [for several reasons] that you saw a lot of promotion dollars vs. advertising dollars in that quarter."
cause for alarm
"There is certainly some cause for alarm about cutting ad spending to make numbers," said Mr. Shore, but he too believes Clorox's explanation washes.
"I do believe Clorox is trying to find the optimal marketing mix," Mr. Shore said, adding that data for bleach and charcoal indicate consumers respond well to promotion of the items.
Clorox volume growth (excluding divestitures) was up 6% for the quarter. That's twice the 3% growth (excluding divestitures) in revenue, which totaled $947 million. Those numbers indicate Clorox really is shifting ad dollars to promotion, said Bill Steele, analyst with Banc of America Securities.
But he's less certain promotion will work uniformly long-term. While he believes people may buy and use extra charcoal on impulse, he's said he's not sure the same is true of bleach.