Investors were feeling pessimistic about WD-40's (NASDAQ:WDFC) growth prospects for the entire 2019 year. The cleaning supply specialist's stock underperformed the S&P 500 and had even declined by as much as 12% by late summer. Shares have recovered over the last few weeks, though, putting WD-40 in positive territory in 2019 (up roughly 6% for the year) but still well below the market's soaring gain.
Investors will get a shot of information this week when the company announces its first-quarter earnings results on Jan. 9 in a report that should show whether growth is accelerating or slowing.
Let's look at what investors will be watching in Thursday's quarterly report.
Sales gains hit a speed bump in the end of fiscal 2019 as revenue growth slowed to 4% from 7% in the previous quarter. CEO Garry Ridge and his team said the slump wasn't due to any fundamental demand issues but instead was a consequence of the regular variability of customer orders and a slight pullback on promotions. WD-40's core multiuse cleaning and lubricating products, in other words, are still capturing market share in the company's key competitive markets. The brand is as strong as it has ever been.
Investors will get confirmation of that strength if they see sales gains stay steady or improve. Another slowdown, on the other hand, might imply bigger demand struggles that would keep pressure on the stock well into 2020.
WD-40's financial strength has been a bright spot in the long-term investing story but less so in recent quarters. The company has had to spend more on key inputs, which has kept gross profit margin grounded at 55% of sales. Elevated capital spending has pressured earnings, too, and that's forced operating income to essentially track sales growth rather than expanding at a faster pace than revenue. Annual operating cash flow worsened in 2019 to $63 million from $65 million.
Executives have telegraphed an end to that boosted spending program in 2020, and investors might get their first evidence of that slowdown in this report or in WD-40's updated outlook for the year.
Looking to 2020
Speaking of that outlook, as it stands today, management is predicting that sales will rise by between 3% and 7% in fiscal 2020. That's a wide range that at the low end implies a global slowdown and at the high end translates into an almost doubling of its prior-year expansion pace.
Those two scenarios are very different, but the good news is that this week's report will shed light on which one is more likely to play out over the next nine months. Thus, investors can expect any shifting or narrowing of WD-40's outlook on Thursday to drive the short-term stock price reaction as Wall Street tries to determine how defensible its brand is against competition in the gear-cleaning and product maintenance niches.