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Church & Dwight’s Q2 beat EPS expectations on strong international and e-commerce growth, but margin pressures and conservative guidance temper the outlook despite disciplined cost control and strategic capital allocation.

# Church & Dwight Q2 FY2025: International Strength and Cost Discipline Offset Margin Pressures

---

## Executive Summary

- **Church & Dwight delivered an adjusted EPS of $0.94**, beating guidance by $0.09 and rising 1% YoY, despite a **slight 0.3% YoY decline in net sales** to $1,506.3 million. The beat was driven by robust international growth and disciplined cost control, partially offsetting domestic softness and one-off charges.
- **Earnings quality was mixed**: While international sales surged 5.3% YoY and e-commerce now represents 23% of global sales, gross margins contracted sharply due to $51 million in pre-tax business exit charges and ongoing tariff headwinds.
- **Management struck a cautiously constructive tone**, highlighting resilience in core brands, successful international expansion (notably HERO and THERABREATH), and strategic portfolio actions, including the Touchland acquisition and a $300 million share repurchase.
- **Guidance for Q3 is conservative**, with adjusted EPS expected at $0.72 (down 9% YoY) and full-year organic sales and EPS growth of 0–2%, reflecting anticipated continued margin contraction and macroeconomic headwinds.
- **Key risks** include cost inflation, tariff impacts, retailer destocking, and underperformance in the vitamin segment. **Opportunities** lie in international and digital sales growth, innovation, and further cost efficiencies. **Catalyst watch:** Integration of Touchland, international momentum, and Q3 marketing ramp.

---

## Performance Snapshot

| Metric                | Reported         | Consensus      | Surprise      | YoY Change      |
|-----------------------|------------------|----------------|---------------|-----------------|
| Revenue               | $1,506.3 million | $1,510 million | –$3.7 million | –0.3%           |
| Adjusted EPS          | $0.94            | $0.85          | +$0.09        | +1%             |
| International Sales   | +5.3% YoY        | —              | —             | +5.3%           |
| Domestic Sales        | –1.4% YoY        | —              | —             | –1.4%           |
| E-commerce % of Sales | 23%              | —              | —             | +3 ppts YoY     |
| Gross Margin (Adj.)   | 45.0%            | —              | —             | –40 bps         |
| Gross Margin (Rep.)   | 43.0%            | —              | —             | –410 bps        |

---

## Earnings Quality

Church & Dwight’s Q2 earnings quality was characterized by **strong international and e-commerce growth**, which helped offset domestic sales declines and significant one-off charges. The **adjusted gross margin of 45.0% (down 40 bps YoY)** and a steeper drop in reported gross margin (down 410 bps YoY) reflect the impact of $51 million in business exit charges and $30 million in tariff costs. **SG&A as a percentage of sales improved by 80 bps to 13.6%**, demonstrating effective cost management. However, cash from operations and CapEx were both reduced, indicating a more cautious approach to capital deployment amid ongoing cost pressures.

---

## Management Commentary & Guidance

Management’s tone was **cautiously constructive**, emphasizing resilience in core brands and the success of international expansion, particularly for HERO and THERABREATH. Strategic actions included the exit of underperforming businesses and the integration of the Touchland acquisition. Capital allocation remains disciplined, with a **$300 million share repurchase** and an expanded credit facility from $1.5B to $2.0B. **Q3 guidance is conservative**, with adjusted EPS expected at $0.72 (down 9% YoY) and full-year organic sales and EPS growth of 0–2%. Management anticipates continued margin contraction (60 bps for FY2025) and plans to increase marketing spend to 12.5–13% of sales in Q3 to support innovation and brand building.

---

## Key Risks

- **Cost inflation and margin pressures** from tariffs ($30 million impact in 2025), product recalls, and business exit charges.
- **Regulatory and macroeconomic risks**, including inflation, geopolitical tensions, and retailer destocking.
- **Operational challenges** in the vitamin segment, with gummy vitamins down ~25% YoY.
- **Execution risk** on integration of acquisitions and business exits.

---

## Expected Market Reaction

The market is likely to **react favorably in the near term** to the adjusted EPS beat, robust international growth, and proactive capital management. However, **conservative guidance and ongoing margin pressures** may temper enthusiasm, leading to a mixed or cautious response as investors weigh short-term headwinds against medium-term opportunities.

---

## Final Takeaway

**Church & Dwight’s Q2 FY2025 was a resilient quarter**, with international and e-commerce growth, disciplined cost control, and strategic capital allocation offsetting margin pressures and domestic softness. The market may be **underappreciating the strength of international momentum and digital sales expansion**, while potentially overemphasizing short-term margin headwinds. 

**Upcoming catalysts:**  
- Progress on Touchland integration and international expansion  
- Q3 marketing ramp and innovation pipeline updates

Overall, Church & Dwight remains well-positioned for long-term growth, but near-term execution and margin management will be critical to sustaining investor confidence.

CHD: International Growth Offsets Margin Headwinds

Church & Dwight faces ongoing margin and revenue pressures, with domestic weakness and a significant inventory charge likely to weigh on Q2 2025 earnings.

# Church & Dwight (CHD): Navigating Margin Pressures and Inventory Headwinds—A Forward-Looking Q2 2025 Earnings Outlook

## Executive Summary: Cautious Guidance Amid Persistent Domestic Weakness

We maintain a **Neutral** outlook for Church & Dwight (CHD) heading into Q2 2025, as management’s guidance and recent financial trends point to continued top-line softness and margin compression. **Q1 2025 revenue declined to $1.47B (–2.4% organic)**, and management’s Q2 guidance calls for **organic sales between –2% and flat, with adjusted EPS of $0.85**—notably below consensus. While international and e-commerce channels remain relative bright spots, **domestic retail headwinds and a planned $60–80M non-cash inventory charge** could further pressure results. The market may be underestimating the near-term impact of these hidden expense headwinds on EPS.

## Recent Trends Signal What’s Next: Revenue and Margin Compression Persist

Recent quarters have shown a clear deceleration in both revenue and profitability. **Q1 2025 saw total revenue at $1.47B (–2.4% organic)**, with **gross margin slipping from 45.7% to 45.0%** and **operating margin contracting**. The following table summarizes the last four quarters, highlighting the downward trend:

### Quarterly Financial Trends

| Quarter    | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | EPS ($) |
|------------|--------------|------------------|----------------------|---------|
| Q2 2024    | 1.45         | 45.9             | 20.2                 | 0.92    |
| Q3 2024    | 1.48         | 46.1             | 20.5                 | 0.97    |
| Q4 2024    | 1.50         | 45.7             | 20.0                 | 0.95    |
| Q1 2025    | 1.47         | 45.0             | 19.6                 | 0.85    |

**Trend:** Revenue and margins have softened sequentially, with Q1 2025 marking a notable step down in both EPS and profitability. This pattern, combined with management’s conservative Q2 guidance, suggests continued pressure in the upcoming quarter.

## Management’s Forward Tone and Positioning: Defensive and Cautious

Management’s tone has shifted from cautious optimism to clear defensiveness. In the Q1 2025 call, leadership stated, **“We remain cautious given current macro conditions and see no near-term recovery in domestic retail.”** This contrasts with prior quarters, where the focus was on “navigating volatility” and “targeted growth investments.” The Q2 2025 guidance—**organic sales of –2% to flat and adjusted EPS of $0.85**—reflects this more conservative stance, signaling to investors that margin and revenue headwinds are expected to persist.

## KPI Trends & Upcoming Quarter Drivers: Volume, E-commerce, and Inventory

Three KPIs will be critical for Q2 2025:

- **Volume:** Q1 2025 saw a **1.4% YoY decline in unit volume**, indicating weak underlying demand.
- **E-commerce Penetration:** Digital channels contributed **22.9% of consumer sales** in Q1, up from 21.5% a year ago, partially offsetting brick-and-mortar softness.
- **Inventory Levels:** Inventories rose, with a **flat cash conversion cycle at 28 days**, suggesting potential for further retailer destocking.

### KPI Movement Table

| KPI                   | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|-----------------------|---------|---------|---------|------------|------------|
| Unit Volume Growth    | +0.5%   | –0.8%   | –1.4%   | –1.9pp     | –0.6pp     |
| E-commerce % of Sales | 21.5%   | 22.2%   | 22.9%   | +1.4pp     | +0.7pp     |
| Cash Conversion (days)| 28      | 28      | 28      | 0          | 0          |

**Implication:** Declining volumes and rising inventories could further pressure revenue and margins, while e-commerce growth offers only a partial offset.

## Missed by the Street: Hidden Expense Headwinds

A key overlooked risk is the **planned Q2 non-cash charge of $60–80M for inventory adjustments and portfolio pruning** (per recent filings). This is not fully reflected in consensus EPS estimates and could further suppress reported earnings. Management’s subtle language—“We expect to take a non-cash charge related to inventory optimization in Q2”—suggests this is a near-term headwind that the market may be underestimating.

## Scenarios for the Upcoming Quarter: Bull, Base, and Bear Cases

### Q2 2025 Scenario Table

| Scenario   | Revenue ($B) | EPS ($) | Operating Margin (%) | Key Assumptions                                      |
|------------|--------------|---------|----------------------|------------------------------------------------------|
| Bull       | 1.49         | 0.90    | 20.0                 | Strong international & e-commerce, stable input costs|
| Base       | 1.47         | 0.85    | 19.6                 | Mixed domestic/international, mild cost pressure     |
| Bear       | 1.43         | 0.75    | 18.5                 | Persistent domestic weakness, higher input costs, inventory charge hits EPS |

**Most Likely:** The **Base case** is most probable, given management’s guidance and current trends—expecting flat to slightly negative revenue growth, continued margin compression, and EPS near $0.85.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter    | Revenue ($B) | EPS ($) | Gross Margin (%) | Operating Margin (%) |
|------------|--------------|---------|------------------|----------------------|
| Q2 2024    | 1.45         | 0.92    | 45.9             | 20.2                 |
| Q3 2024    | 1.48         | 0.97    | 46.1             | 20.5                 |
| Q4 2024    | 1.50         | 0.95    | 45.7             | 20.0                 |
| Q1 2025    | 1.47         | 0.85    | 45.0             | 19.6                 |

### KPI Movement Table

| KPI                   | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|-----------------------|---------|---------|---------|------------|------------|
| Unit Volume Growth    | +0.5%   | –0.8%   | –1.4%   | –1.9pp     | –0.6pp     |
| E-commerce % of Sales | 21.5%   | 22.2%   | 22.9%   | +1.4pp     | +0.7pp     |
| Cash Conversion (days)| 28      | 28      | 28      | 0          | 0          |

### Key Management Quotes

1. **“We remain cautious given current macro conditions and see no near-term recovery in domestic retail.”**  
   *Q1 2025 Earnings Call*  
   *Signals a defensive outlook and limited optimism for domestic rebound.*

2. **“We expect to take a non-cash charge related to inventory optimization in Q2.”**  
   *Q1 2025 10-Q Filing*  
   *Indicates a likely hit to Q2 EPS not fully reflected in consensus.*

3. **“International sales continue to outperform, up 2.7% YoY, offsetting some domestic weakness.”**  
   *Q1 2025 Earnings Call*  
   *Highlights the importance of international segment as a buffer.*

4. **“E-commerce now represents nearly 23% of consumer sales, and we expect this channel to remain resilient.”**  
   *Q1 2025 Earnings Call*  
   *Points to digital as a partial offset to brick-and-mortar softness.*

5. **“Input cost inflation and FX remain headwinds for the remainder of the year.”**  
   *Q1 2025 Earnings Call*  
   *Warns of ongoing margin pressure from costs and currency.*

6. **“We are focused on operational efficiency and maintaining a stable cash conversion cycle.”**  
   *Q1 2025 Earnings Call*  
   *Suggests cost discipline, but not enough to offset top-line weakness.*

7. **“Guidance for Q2 is organic sales between –2% and flat, and adjusted EPS of $0.85.”**  
   *Q1 2025 Guidance Update*  
   *Sets a conservative baseline for investor expectations.*

---

**Bottom Line:**  
CHD’s Q2 2025 outlook is defined by cautious management guidance, persistent domestic headwinds, and the risk of underappreciated expense charges. While international and e-commerce channels offer some resilience, the path to margin recovery remains uncertain in the near term.

CHD: Margin Headwinds and Inventory Risks Persist