Investors had modest expectations for sales and profit gains from WD-40 (WDFC 0.89%) as the chemical products specialist closed out its fiscal year this past week. A growth rebound in the prior quarter supported a stock price rally in July, but shares had still sat out the market rally this year and were in slightly negative territory by mid-October.
WD-40's fiscal fourth-quarter results didn't do much to change that picture of a minor slump, but positive overall progress toward management's long-term goals. CEO Garry Ridge and his executive team held a conference call with Wall Street analysts immediately following the report's release to put the latest trends into perspective while adding context to the company's fiscal 2020 forecast. Below are a few highlights from that presentation.
Don't read too much into the sales miss
It's common for our sales results to fluctuate one period to another due to various factors, including the level of promotional activities, specific programs being run at customer locations, the timing of customer orders or the impact of new product launches. -- Ridge
WD-40's sales rose 4% in the fourth quarter to mark a slowdown compared to the prior quarter's 7% jump. This sluggish revenue figure also resulted in revenue for the full year coming in just below management's July forecast. Rather than rising to between $425 million and $437 million, constituting as much as a 6% increase, revenue ended up at $423 million for roughly 4% growth.
Executives didn't highlight any particular demand challenge in any of its markets or across its maintenance and cleaning products. Instead, they suggested the sales slowdown was just a part of the broader business cadence. Sales volumes for its core multiuse canister, for example, fell 3% in the U.S. mainly because of an unusually strong promotion in the year-ago period.
Preparing to spend cash
We have historically had an asset-light business model which has required very low levels of capital investment. Fundamentally, nothing has changed over the long-term, and we believe this is a good way to think about our current and future capital needs. However, more recently, we have been investing more heavily to support our growing business. -- CFO Jay Rembolt
The consumer staples company spent more than usual on capital expenses last year on adding production facilities and expanding its manufacturing capabilities. Investors should expect another year of elevated costs ahead, too, with more proprietary equipment on the way. WD-40's gross profit margin will also be pressured by elevated commodity costs that threaten to keep profitability below 55% of sales.
While the company can't control much about the cost environment, management is optimistic that their spending pace will slow after 2020. "We are nearing the end of this heightened period of capital investment," Rembolt said, "and we will be returning to our asset-light model in the near future."
Looking to 2020
We are guiding toward net sales growth projected to be between 3% and 7% with net sales expected to be between $436 million and $453 million. Gross margin for the full year is expected to be between 54% and 55%. Advertising and promotion investment is projected to be between 5.5% and 6% of net sales. -- Rembolt
Executives confirmed that they didn't see the fourth-quarter growth slowdown continuing into the new fiscal year by calling for sales gains to land between 3% and 7% in 2020, suggesting a modest acceleration year over year. Even the top end of that range would be below the growth pace management would need to reach its aspirational target of $700 million in annual sales by 2025. Yet that outlook still implies steady sales gains and cost-driven profitability declines for the maintenance product specialist.