Clorox released second quarter earnings guidance today and the results were not good. Clorox also announced that it was taking a goodwill impairment charge of about $250 million due to the Burt’s Bees acquisition.
The Clorox press release quoted CFO Dan Heinrich stating, “The Burt’s Bees business remains a very solid contributor to Clorox’s results, with sales growth and profit margins above the company average…. Despite the impairment, Burt’s Bees remains the fastest growing business unit in the company, with double-digit fiscal-year-to-date sales growth, and our revised estimates continue to project low double-digit sales growth for this business over the next several years.”
This is all very odd.
Clorox purchased Burt’s Bees in at the end of 2007 for $925 million, net of an additional $25 million payment for tax benefits. Now, three years later, the company is writing off about $250 million, over 25% of the purchase price.
At the same time, the CFO is proclaiming that Burt’s Bees is the fastest growing, highest margin part of the company.
There is a substantial disconnect in the story.
I think there are two possible explanations.
First, it could be that Clorox vastly over-paid. If Burt Bee’s is indeed performing as well as the CFO suggests, then the acquisition must have been based on some rather extraordinary assumptions. Double digit sales growth for consumer product staples like shampoo and lip balm is quite an achievement, especially when combined with company leading margins. The fact that this is way under the acquisition forecast indicates that the team at Clorox must have optimistic indeed when valuing Burt’s Bees.
Second, things at Burt’s Bees might not be as cheery as the CFO suggests. Indeed, today’s announcement is a bit over the top in its praise for the brand. It could well be that the business is struggling in a tough economic environment.
Either way, the Burt’s Bees acquisition is clearly not going well financially for Clorox. There isn’t a lot of obvious synergy with Clorox’s other business units, either. Indeed, Clorox is running Burt’s Bees as a totally distinct business. If you have some time, try finding Clorox branding on the Burt’s Bees website.
The lesson in this: be very careful when acquiring exciting little brands. Optimistic assumptions can lead to bad business decisions.