It didn't take Sherwin-Williams (SHW 0.36%) long to return to sales growth following COVID-19 closures. The paint supply giant announced surprisingly strong demand trends as part of its fiscal third-quarter update in late October. Those metrics supported management's second straight upgrade to the 2020 outlook, which now calls for significant growth this year despite several weeks of pandemic disruptions to the business.
In a conference call with Wall street analysts, CEO John Morikis and his team explained the main factors behind Sherwin-Williams' rebound, which they see positioning the company for steady growth into 2021.
Let's look at some highlights.
Image source: Getty Images.
Colorful results
We generated very solid sales growth in the quarter with all three operating segments growing year-over-year, exceeding the original guidance we provided at the end of July and improving sequentially.
-- Morikis
Sherwin-Williams' growth was powered by surging demand in its U.S. retail business as consumers spent aggressively on home improvement projects. Executives described a supportive selling environment for interior home repaintings, new home purchases, too, which all contributed to global sales gains landing at 5%. That result outpaced the roughly flat forecast they issued back in late July.
The performance coatings division returned to growth in the period, and that just left Sherwin-Williams' commercial segment as the biggest struggling niche. But even that unit is on track for a full recovery as most projects are being delayed rather than canceled, executives said.
Financial wins
The gross margin expansion in the quarter was driven by sales growth, effective pricing, favorable mix and lower input costs.
-- Morikis
Several factors combined to produce some head-turning financial metrics: Adjusted earnings jumped 21% and operating cash soared 54% from the prior-year period.
The biggest contributor to these wins was rising gross profitability, which came from higher margins across Sherwin-Williams' biggest divisions. Input costs dropped, prices rose 2% on average, and shoppers increasingly traded up to more premium products.
SHW Operating Margin (TTM) data by YCharts.
As a result, pre-tax income jumped to $876 million from $710 million a year earlier. "This incredible team ... delivered record results in a very challenging environment," Morikis said.
Looking out to 2021
We anticipate fourth quarter 2020 consolidated net sales will increase by 3% to 7% versus the fourth quarter of 2019.
-- Morikis
Sherwin-Williams' short-term outlook implies a second consecutive quarter of strengthening results on a global basis, with the key growth factors holding steady compared to the latest quarter. Executives see plenty of reasons to be optimistic as demand is strong across almost its entire portfolio. The company is adding new stores, raising prices, and continuing to deliver premium paints to both residential and commercial customers.
The fourth quarter is a seasonally weak one for the business, but executives still see the faster growth trends sending sales higher in the low single digits for the full 2020 year. That forecast had called for flat revenue in late July.
The picture is even brighter on earnings, which are now set to land between $21.49 and $21.79 per share, up from the prior prediction range of $16.46 to $18.46 per share. While investors will have to wait until early 2021 for a detailed outlook on the new fiscal year, management sounded optimistic about the broader growth potential. "There is tremendous opportunity in front of us in every one of our businesses," Morikis said, "and in many ways we're just getting started."
