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RPM International: Why the Consumer Business Is Slumping

By Demitri Kalogeropoulos and Brian Withers – Oct 12, 2021 at 11:45AM

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It's mostly about temporary supply chain issues.

Coatings and sealants specialist RPM International (RPM -1.49%) recently announced results. Sales dropped in its core consumer-focused segment and earnings dove. 

In this video from "Beat & Raise" from Motley Fool Liverecorded on Oct. 6 , Fool contributors Demitri Kalogeropoulos and Brian Withers discuss things.

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Demitri Kalogeropoulos: The main story here is the consumer segment that I mentioned is the one that's struggling while all the other divisions are strong.

Let me pull up the slide; this is from their investor presentation today.

The CPG these are the other three [construction] products, performance products and specialty products. Then you see consumer on the right there, which is that one division. You can see the other divisions all grew in that almost 20% range sales is the blue line here. They are operating earnings were up, but then there is obviously one of these things is not like the together.

The Consumer Group had 16% lower sales and a dramatic 66% drop in earnings. That was mainly because there's a couple of things involved here. Number one is, this is the category that got huge growth a year ago with the pandemic report spending obviously a lot of more time at home and more money on home maintenance products and things like that. It's a really tough comparison with last year. Sales were still up compared to 2019 though that's important to remember here.

The other big thing though is that there was what they call an acute supply chain challenge in this group; massive raw material shortages and huge spikes in costs.

Management like I said warned about this. I'm going to stop that. Management warned about this last quarter and we basically saw exactly what they said. This is the thing that's not going to surprise you. You can see these shortages happening as they amount. But they did say that they're not basically done with this yet.

We've got probably at least another quarter of these raw material issues in the supply chain challenges that are going to impact the Consumer Group for the next quarter. Then they still expect healthy growth overall in those other groups too. The good news is this is just temporary, the bad news is it's not totally over yet. That's the highlights with that one.

Brian Withers: Yeah Demitri. The stock is actually up today, which says to me that the management has done a good job of communicating this in advance. "Tell me what you're going to tell me [laughs] say that thing and then remind me what you told me." I think it's a great rule for management.

They have been always very consistent and they seem to have a very predictable business with their supply chain and things like that. The thing that I guess I would worry about this company which maybe over the five-year horizon, I don't think it's going to matter, but over the next year, as they deal with the supply chain shortages and catching up it seems like everybody bought some stuff for projects around the house and it's sitting in the garage now.

I looked at the earnings report for that consumer segment and man it just tanked. It wasn't inconsequential either. It's a decent part of the business and a good part of their revenue. But hopefully, they are able to transition and move some of those costs as they're catching up the supply chain piece that they don't have factories sitting idle. Hopefully they can move those resources to the other three segments.

Kalogeropoulos: It's a challenge I guess also seeing. It's hard I guess to see because the industry is still growing in terms of home sales and those numbers are near home prices. Let's see the statistic is. I forget, but it's one of those niches that basically drive Home Depot and Lowe's low sales.

The spending that people do on their houses, it's still record record highs so it's hard. One of the worries is, yeah, if you need them to be able to solve the supply chain challenges as quickly as possible so we can take advantage of that growth before cyclical drop.

It's a little jarring to see that segment dropped so much when the overall market is still growing.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends RPM International. The Motley Fool has a disclosure policy.

Stocks Mentioned

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