The bears ruled the day yesterday against Toro (NYSE: TTC). Even though earnings met expectations for the quarter, up almost 11% to $1.02 a share, other metrics didn't fare as well, and the stock got mowed down by nearly 7%.
Sales growth was disappointing, at less than 2%. Professional-segment sales actually rose 4%, but sales in the residential segment, which accounts for 29% of the total, offset that uptick with an 8.5% drop. Management blamed the decrease in the residential segment on lower shipments of snowthrowing equipment, which in turn was blamed on a mild winter.
Wherever management wants to cast the blame, the fact remains that Toro's lawn-and-landscape sector faced a difficult economic environment. Deere (NYSE: DE) also suffered a rough quarter. But since Toro ended the period with lean inventories, don't expect widespread markdowns that would hurt margins going forward. What's more, management said Toro's market share actually increased in most of its businesses. So relative to its competitors, it must have done better. (In the retail segment, Toro competes with companies such as Sears (NYSE: SHLD) and its Craftsman line of equipment.)
Despite the lack of top-line growth, margins expanded nicely. A focus on cost-cutting and efficiencies caused gross margins to expand 150 basis points, to 37.1%. In an added boost, management showed confidence in its products by increasing its earnings guidance for the year to 13%-14%, from 11%-14% -- a little surprising, since management expects only a 3% sales growth for the year, but it apparently speaks to management's optimism for results down the road.
Toro has some powerful brand names in its stable, not to mention agreements to maintain the venues of many professional sports teams, including the Atlanta Braves, Baltimore Orioles and Ravens, Chicago Cubs and Bears, and both New York baseball teams. Its initiatives are helping boost the bottom line and increase market share. When sales do pick up, earnings growth should get a charge. Then there will be no stopping the bull.
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Fool contributor Larry Rothman is happy to receive feedback, and he promises to read it when he's not being wrestled by his three children. Feel free to email him at rothmanviews@comcast.net. He doesn't have any positions in the companies mentioned.
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