Dorman Products (DORM -0.10%) has been able to profit from high demand for auto parts for several years, and that has led some investors almost to take for granted Dorman's ability to outperform many of its peers in the parts industry. By focusing attention on exactly which sorts of parts are most likely to produce the best opportunities to maximize profit, Dorman has been able to prosper in areas where companies with a more generalist bent haven't succeeded.
Coming into Tuesday's first-quarter financial report, Dorman investors hoped that the company would be able to produce solid growth in both revenue and earnings. Dorman made good on those general expectations, but the extent of the gains on the bottom line wasn't quite as large as what most were looking to see. In particular, a surprising drop in sales over the internet ran in the face of the trends toward e-commerce that investors have seen in the retail sector and contributed to sluggish overall performance.
Image source: Dorman Products.
Dorman starts 2018 slowly
Dorman Products' first-quarter results reflected some of the struggles that the parts maker has seen. Sales were higher by 2.5% to $227.3 million, but that was weaker than the nearly 6% growth that those following the stock wanted to see. Adjusted net income rose a slightly stronger 8% from year-ago levels, but the resulting adjusted earnings of $0.96 per share fell well short of the consensus forecast for $1.03 per share.
Particularly disturbing was the fact that all of the top-line gains at Dorman came from acquisitions. MAS Automotive Distribution was responsible for about $10 million in sales during the period, and without that revenue, year-over-year sales would have been down by about 2%. In addition, the figures reflect a nice drop in the tax rate that Dorman had to pay, with about $6.4 million in tax savings coming from a reduction of almost 12 percentage points in the effective rate of tax for the company.
Dorman tried to focus on its fundamentals. The company added 1,600 products with new SKUs during the quarter, marking a 24% increase from year-ago levels. The heavy-duty solutions segment was especially strong, climbing at a better than 30% pace during the quarter. Dorman attributed much of the growth in SKU counts to newly introduced programs targeted at air suspension systems and loaded steering knuckles. In addition, Dorman took advantage of the acquisition of MAS Automotive Distribution by introducing an integrated comprehensive chassis program, which offers features like maintenance-free driving and a choice of parts to meet different customers' needs.
CEO Matt Barton explained some of what held Dorman back. "We continued to feel customer inventory destocking pressure throughout the quarter," Barton said. "Also, we experienced a year-over-year sales decline for sales transacted over the internet, a result of brand protection pricing policy changes made in early Q4 of last year."
Can Dorman hit the gas?
Dorman has reason for optimism. The CEO noted that order rates improved over the course of the quarter, coming in quite strong in March, and Barton seems to think that the positive momentum on the order flow front should translate to better conditions in the current quarter.
Despite continued share-price weakness, Dorman pulled back slightly on its stock buyback activity. The parts maker announced total repurchases of almost 129,000 shares at an average price of just under $70 per share. Having spent $9 million on those efforts, Dorman has a bit less than $68 million left for future buybacks.
Dorman kept its 2018 guidance largely unchanged. Sales should still rise 6% to 9% over the course of the year, and Dorman repeated its call for adjusted earnings in a range of $4.10 to $4.32 per share, corresponding to growth of 22% to 28%.
Even though the company's results weren't perfect, Dorman investors seemed content with its performance, and the stock climbed 1% in morning trading Wednesday following the Tuesday night announcement. Even though some shareholders aren't happy seeing a pullback in e-commerce activity from the auto parts maker, Dorman's longer-term efforts to stoke business for the future look promising.
