Investors were left disappointed after WD-40's (WDFC 4.57%) latest set of earnings. However, at the time of writing, the stock was down more than 19% in 2021, and the dip will surely attract value investors into a company with a highly visible household product. Is now the time to take advantage of the dip?
I'm going to cut to the chase. I think the answer is no -- it's not the time to buy the dip. There are three main reasons for this.
- Despite the benefit of the stay-at-home measures -- spending on DIY surged during the lockdowns -- management has been walking down expectations for its mid-term revenue targets.
- Hitting guidance will not be a walk in the park.
- Spending on advertising and promotions increased in the fourth quarter to drive revenue growth at the cost of earnings.
I'll deal with these points in turn.
On the company's second-quarter 2020 earnings presentation in April 2020, management made a subtle change to its long-term revenue growth aspirations. Instead of an "anticipated revenue target" of $700 million in the full year 2025, management shifted it to $700 million as a "long-term target." Fast forward to the third-quarter 2021 earnings in July 2021, and it changed its revenue target to $650 million to $700 million in full-year 2025.
While it's completely understandable that many companies, including WD-40, are facing challenges due to supply chain issues, it's also worth noting that the company is one of the beneficiaries of the pandemic due to the stay-at-home measures. Moreover, during the third-quarter earnings call, CEO Garry Ridge told investors, " ... we do believe that the shift in consumer spending patterns associated with the pandemic will benefit us over the long term."
If that's the case, then it's reasonable to expect WD-40 to be raising its long-term growth aspirations, not cutting them.
In addition, there are question marks around the company's ability to hit its guidance. For example, in the recently reported fourth quarter, WD-40 reported a 3% increase in sales to $155.2 million, but on a constant currency basis, net sales were only $108.8 million compared to $111.6 million in the same quarter of last year.
Part of the constant currency sales decline is due to supply chain disruptions. Still, management acknowledged that it's also coming up against tough comparisons with the "isolation renovation" sales boost caused by the pandemic.
Given that those difficult year-over-year comparisons will extend into 2022, the company's guidance for net sales growth of 7% to 11% is open to question.
Also, even if WD-40 hits its 2022 sales target, the midpoint of which is $532 million, it will still have to perform a lot better than it has in recent years to hit its 2025 target. For example, to hit $700 million in 2025 from $532 million in 2022 implies a compound annual growth rate (CAGR) of 9.6%, and to hit $650 million means a CAGR of 6.9%.
By way of comparison, here's the sales performance over the last five years. Note that the CAGR from 2019 to 2021 was 7.4%, and between 2017 and 2021 it was just 5.1%. So WD-40 will have to step up its growth to hit its 2025 target, and that's even with accepting its 2022 guidance for around $532 million in net sales.
|Net sales||$381 million||$409 million||$423 million||$408 million||$488 million|
|Net sales growth||0%||7.5%||3.4%||(3.5%)||19.6%|
Advertising and promotional spending
WD-40 operates a so-called 55/30/25 business model, aiming for 55% gross margin, a cost of doing business of 30% of revenue (a lower number is better), and earnings before interest, taxes, depreciation, and amortization (EBITDA) of 25%.
As you can see below, the company didn't hit any of these targets in the fourth quarter or the full year. Furthermore, the cost of doing business and EBITDA figures were negatively impacted by a ramp up in spending on advertising and promotions (to 8.9% of sales). Although management said this was a one-off increase, it's still a case of ramping investment and walking down long-term guidance at the same time.
Fourth Quarter 2021
|Cost of doing business||30%||39%||35%|
A stock to buy?
Trading on more than 40 times its 2021 earnings and 39 times the midpoint of management's 2022 guidance, WD-40 remains a highly rated stock. What's more, it is not performing in line with a high-growth company rating. CEO Garry Ridge, who sold $11.9 million worth of stock in July, wants investors to take an "infinite mindset." That's something they will have to do to justify buying a stock on this kind of valuation.