WD-40 Company (NASDAQ:WDFC) is good at flying under Wall Street's radar. Apparently, selling a handful of iconic, high-margin consumer products at a steady clip and avoiding the spotlight don't make for an exciting enough business for analysts to follow. If you look at the numbers, though, this is a fantastic business with high rates of return well suited for long-term investors.
This past quarter, the company continued to grow both the top and bottom lines and showed that it's doing well at exploiting its most promising growth opportunity. Here's a brief look at the most recent results and what investors can expect in the coming year.
By the numbers
|Metric||Q1 2018||Q4 2017||Q1 2017|
|Revenue||$97.6 million||$96.5 million||$89.2 million|
|Operating income||$17.1 million||$19.9 million||$16.5 million|
|Net income||$12.6 million||$14.4 million||$11.8 million|
There aren't a whole lot of reasons for investors to be disappointed as the company delivered higher-than-expected results for both revenue and earnings. Some of that was due to favorable foreign exchange rates -- which had previously been a drag on earnings -- and growing sales overseas. All of that sales increase came from its maintenance products segment that houses its iconic WD-40 product as well as some other specialty maintenance products.
In fact, sales in this segment helped to offset declining sales for its cleaning product segment. Management conceded that sales for its cleaning product business will likely decrease over time as it becomes a progressively smaller part of the business, but the profit margins are so high on these products that for now it intends to simply let it ride for a while.
One thing that might pop out to some is that the company's guidance for fiscal 2018 is now lower from its initial guidance last quarter. This change wasn't due to any weakness in the business overall, but instead reflects a revision in accounting standards and how stock-based compensation is treated. Management also noted that the change did not reflect what was made to the corporate tax rate enacted with the most recent tax bill. In fiscal 2016 and 2017, WD-40's effective tax rate was 27% and 29%, respectively, so the benefit will be noticeable in the coming year.
What management had to say
I think it's safe to say that WD-40 is a rather mature product in the U.S. market. It has been around for decades, and that blue and yellow can is a recognizable and ubiquitous brand. So it was a little startling to hear CEO Garry Ridge on the company's conference call mention how fast its signature product grew last year.
[F]or the first time in a long-time, foreign currency exchange rates are not diluting our reported net sales results. Our flagship product, WD-40 Multi-Use Product grew 10 percent in the first quarter, and our WD-40 Specialist product line grew 29 percent compared to the prior-year quarter. Overall we are off to a good start in 2018 and we believe our focus on executing against our strategic initiatives will continue to drive revenue growth, further strengthen our financial foundation, and enhance shareholder value.
What is surprising is the traction WD-40 is gaining overseas, notably its Europe, Middle East, and Africa segment, which grew sales 16% year over year. Management noted during its investor day presentation that its No. 1 strategic initiative is to expand its sales presence outside the U.S., and that the total addressable market for WD-40 is $1 billion annually.
What a Fool believes
WD-40 is in a relatively mature market, so it's remarkable that management continues to find avenues to grow sales and earnings. This past quarter benefited slightly from some elements we can't count on like foreign exchange rates, but the underlying trend of increasing sales for its signature product both in the U.S. and abroad is an encouraging sign. If it can maintain this trajectory, then its goal of $700 million in annual sales by 2025 seems to be within reach.