WD-40 (WDFC -1.81%) issued fiscal third-quarter results on Tuesday, July 9 that appeared to placate investors' nerves. Shares of the lubricant manufacturer gained 8.5% in the Wednesday trading session that followed the release.
Below, we'll discuss salient details from the quarter, as well as the factors behind shareholders' positive reception of the report. (Note that all comparative numbers in the discussion that follows are presented against the prior-year quarter.)
WD-40 results: The raw numbers
|Metric||Q2 2019||Q2 2018||Change (YOY)|
|Revenue||$114.0 million||$107.0 million||6.5%|
|Net income||$18.1 million||$16.1 million||12.4%|
|Diluted earnings per share||$1.30||$1.15||13%|
What happened with WD-40 this quarter?
- As I discussed last quarter, fiscal second-quarter sales were flat against the prior-year period, due to the timing of sales in the club warehouse channel and delayed promotions with a key U.S. customer. While management characterized these as periodic events, shareholders were nonetheless on guard heading into the third-quarter report. The company's resumption of near-7% revenue growth in the fiscal third quarter (equal to last year's revenue advance and in line with management's longer-term growth targets) reassured investors and provided the impetus for the post-earnings stock appreciation.
- U.S. sales were flat in the third quarter at $53 million, as strong growth in the U.S. was offset by declines in Latin America and Canada. Customers in these two geographical regions had purchased higher-than-normal volumes of product in the prior-year quarter in advance of planned price increases, making for a tough comparison in the current period.
- Sales in Europe, Middle East, Africa, and India (EMEA) rose 13%, to $44.6 million, on higher WD-40 Multi-Use product sales and increased distribution of WD-40 EZ-REACH Flexible product.
- The top line in the Asia-Pacific segment advanced by 14%, to $16.5 million. Management cited rapid uptake of WD-40 Multi-Use product in Asia distributor markets (i.e., non-direct channels) as the primary reason behind the double-digit sales improvement.
- Gross margin dipped slightly by 30 basis points, to 54.5%.
- Operating margin declined by 50 basis points, to 20.4%, as advertising and sales promotion expenses and selling, general, and administrative expenses (SG&A) rose against the prior year as a percentage of sales.
- The company repurchased $10.3 million worth of its own shares during the quarter, bringing its total year-to-date repurchase total to $22.4 million.
What management had to say
In WD-40's earnings press release, CEO Garry Ridge lauded the organization's sales performance. He also returned to a recurring theme in WD-40's business -- namely, that the company really doesn't have a seasonal sales pattern and a changing mix of products and promotions within geographic regions can cause sales volatility that investors should be prepared for:
We had a solid quarter with consolidated net sales up 7 percent from last year and in-line with our targeted compound annual growth rate. The Americas segment came in under our targeted growth rate for the segment because they had a particularly strong comparable period last year. This is because in the third quarter of last year many of our customers in the Americas were buying high volumes of product in advance of our planned price increases in the region. Overall, we are pleased with the solid progress we have made for the year and remain confident that our strategic initiatives are well positioned to carry us into the future. While we continue to see fluctuations in certain markets from time to time, our long-term growth plans remain stable and we expect we will continue to deliver on our expectations.
After slipping back into the well-oiled gear of 7% quarterly revenue growth and with three months left in the fiscal year, WD-40 is confident regarding its full-year financial projections. The company still expects fiscal 2019 sales to land between $425 million-$437 million, which will mark 4%-7% year-over-year growth.
The company tweaked net earnings and diluted earnings per share (EPS) projections, however. Management now anticipates that net income will fall between $63.3 million and $64.4 million, against a previous expectation of $62.2 million-$63.2 million. Diluted EPS are now projected to land between $4.58 and $4.65, versus last quarter's benchmark of $4.51-$4.58.
While these slight adjustments were welcomed by shareholders, it's important to note that they stem primarily from a revision of the company's expected tax rate for the year. A smaller bill from Uncle Sam will result in more earnings per share in 2019.