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Tennant Company Earnings: Growing Pains Drive Down Profits

By Demitri Kalogeropoulos - Oct 23, 2014 at 11:25AM

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Sales are up, but the company's growing product portfolio is creating challenges on the profit side of the equation.

Tennant Company (TNC 1.13%) posted third-quarter earnings results today that beat Wall Street's revenue expectations. And to boot, the cleaning solutions provider raised its sales outlook for the second straight quarter. However, the stock fell slightly in early trading as the company missed profit targets and scaled back its earnings outlook for the full year.

Solid sales gains
Things are looking great for Tennant on the revenue front. Organic sales growth was 9.8% in Q3, which was above the prior quarter's 8.9% improvement. Revenue set a new quarterly record, rising by 7.5% to reach $203 million. Wall Street had been looking for a more modest 6% gain. Meanwhile, the company raised its full-year sales target to between $810 million and $820 million, as compared to the $800 million to $815 million it had forecast back in June.

A Tennant scrubber. Source: Tennant Company.

"We are very pleased with the impact our new growth strategies have had on Tennant's sales in 2014," CEO Chris Killingstad said in a press release. The biggest contributor to those gains came from Tennant's North American region, which grew by 9.3%. The Europe and Middle East region also kicked in a solid improvement, rising by 8.5%.

But the Asia-Pacific markets were the biggest challenge: Sales shrunk by 5.6% there due to what the company called "economic uncertainties" in Australia, Japan, and China. Still, management expects that region to bounce right back and post sales growth next quarter, as well as for the full fiscal year.

Supply chain challenges 
In contrast to those solid revenue trends, Tennant turned in some disappointing earnings results. Profitability slipped, with gross margin falling below expectations. Management blamed supply chain challenges tied to new product launches for the dip. "These are short-term growing pains; they are fixable and we are taking the necessary steps for improvement," Killingstad said.

The profit pinch resulted in per-share earnings growth that was below Wall Street's targets. Earnings increased 12% to $0.63 per share while analysts had been looking for a larger jump to $0.69. The company also lowered its full-year profit target slightly. Tennant now sees 2014 earnings of about $2.65 per share compared to the $2.70 per share it had forecast three months ago.

Bottom line
While Wall Street never likes to see a falling profit forecast, this one is fairly tame. After all, we're talking about just a 2% dip in Q4 profit expectations. In addition, that new forecast comes with a sales outlook that is rising, not falling. And Tennant's long-term growth targets haven't changed: Management still aims to reach $1 billion in annual sales and a 12% operating margin by 2017. 

Sure, Tennant took a small step back on that profit goal this quarter. Q3 operating margin slipped to 8.4% from the prior year's 8.6%. But small quarterly changes like that can often be deceptive. For example, take even a small step back and the negative trend disappears: Operating margin for the first three quarters of the year improved to 8.2% from the 8% set in the comparable period of 2013.

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Tennant Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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