What happened

Shares of lubrication specialist WD-40 Company (WDFC -0.00%) lost their grip on Friday, sliding by 12.6% as of 11 a.m. ET after the company reported deep declines in both sales and earnings for its fiscal 2022 third quarter, which ended May 31.

Ahead of the report, analysts had forecast that WD-40 would earn $1.27 per share -- already significantly less than the $1.52 per share it earned a year ago. In fact, WD-40 earned a mere $1.07 per share, and on sales of only $123.7 million -- a nearly $13 million drop from the year-ago quarter.    

So what

Management blamed "translation of the Company's foreign subsidiary results to U.S. dollars" as well as other "global disruptions" for the sales decline -- an explanation that doesn't really mix well with water, because such foreign-currency effects accounted for only a $100,000 difference in net sales for the quarter. The bigger problem was that gross profit margins contracted by 540 basis points year over year, although management tried to mitigate the damage by cutting spending on advertising and sales promotions, as well as reducing other selling, general, and administrative expenses.  

WD-40 cited inflation as a culprit for that margin erosion, but promised to try to get gross profit margins back up into the 55% range over time. Management also noted that it has raised prices in at least two of its three biggest sales regions -- the Americas and Asia-Pacific -- to counteract inflationary pressures.

Now what

Investors were nevertheless understandably disappointed by the results. In the press release, CEO Garry Ridge encouraged shareholders to "see the forest through the trees," insisting that WD-40 still has "a very strong moat ... strong balance sheet [and] generate steady cash flows." But consider:

Operating cash flow in the fiscal third quarter was actually a weak $3.6 million -- down 83% year over year -- and capital spending ate almost all of that up, leaving the company with positive free cash flow of only $300,000 in the quarter, down 98% year over year. Nor do things look likely to improve anytime soon.

New guidance forecasts that WD-40 will earn no more than $5.10 per share in its fiscal 2022. On the plus side, that would be roughly flat against last year. On the minus side, with WD-40 valued at 35 times current-year earnings and with neither sales nor profits rising, it's hard to make a buy argument for the stock right now.