The pandemic upended business as usual across the world, with some companies being hurt and others benefiting. In the case of WD-40 (WDFC +0.25%), which is best known for its namesake lubricant/water displacer, its collection of household and cleaning products were in high demand during the early days of the global health scare.
But now that things are getting back to normal, management is stepping back and reexamining its overall business. Here's why the household and cleaning division might get the boot.
1. The benefit is over
In the first nine months of fiscal 2021, WD-40's household and cleaning products sales totaled roughly $28.4 million. Through the first nine months of fiscal 2023, that figure had dropped to $25.1 million. So in just two years, revenue in this business line fell nearly 12% as COVID-related demand abated. That's clearly not a great trend.
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During WD-40's third-quarter 2023 earnings call, CEO Steve Brass said, "We consider our homecare and cleaning products as harvest brands that continue to generate consistent contributions and cash flows, but are generally expected to become a smaller part of our business over time."
Reading into that, the company benefited from the coronavirus demand spike, but it didn't invest in the business. And as demand continues to normalize, sales will continue to shrink.
That's not how a company would treat a division that it considered valuable over the long term. It also helps explain Brass' statement from later in the call that "we're just signaling to investors that we are taking a strategic look at those brands."
That comment came in answer to an analyst question about the plans for the homecare and cleaning business. So there is clearly something going on, though the company isn't exactly saying what just yet.
2. It's a relatively small business
The next big factor to consider is that WD-40 is a fairly small company, with a market capitalization just shy of $3 billion. Revenue through the first nine months of 2023 totaled $396.8 million, with household and cleaning products chipping in only $25.1 million of that sum. So it makes up about only 6% of the top line. The rest of sales come from the company's maintenance products division, which includes the WD-40 brand.
Comparing the very different sizes of these two lines of business, it wouldn't be a stretch to suggest that the household and cleaning products division is, perhaps, a distraction. On that front, it helps to note that sales in the maintenance division were nearly 8% higher in the first nine months of fiscal 2023 than they were in the same period of fiscal 2021.
So while the smaller division started to shrink, the larger one continued to expand. Which division would you want to put your money behind?
NASDAQ: WDFC
Key Data Points
3. The big competition
WD-40's household and cleaning products brands include names like 2000 Flushes and Carpet Fresh. While these aren't exactly no-name brands, they aren't really industry leaders, per se.
And they compete with brands from much larger consumer staples companies like Procter & Gamble and Clorox, among many others. Most of these companies have better-known products. Competing with giants like this is hard for other giants; it is extra hard for small fry like WD-40.
With WD-40's limited managerial and financial resources, putting more money behind small brands seems like a bad use of investor capital when the maintenance products division is doing so much better.
4. Where's the opportunity?
The low-hanging fruit for WD-40 is within its largest business, where it has been bringing out higher-margin products. For example, it has been rolling out a WD-40 can with a flexible spray tube. That type of innovation isn't particularly exciting, but it can quickly move the needle on the top line for a product that holds a leading position in its market.
Creating new and improved household and cleaning products in a highly competitive space where the company isn't the top entrant is harder and is likely far less compelling from a risk/reward perspective. It would require doing more than just redesigning a package.
So from a long-term standpoint, the opportunity for business growth looks more likely to be in the maintenance division.
Time to move on?
WD-40 appears to be taking a realistic look at its portfolio, and it seems likely that the relatively tiny household and cleaning products division is going to be the odd man out. Getting out from under this business would free up time and resources for the company's more important maintenance business, and that's not a bad thing.
That said, given the portfolio of brands it owns, WD-40 might have a harder time than it would like getting out from under the household and cleaning products business. However, selling while the segment's revenue is still strong is probably a better choice than letting the brands languish with little company support -- which seems to be what is happening now as WD-40 simply harvests the cash this division is throwing off.
