Car owners know how expensive it can be to get repair work done, and the companies that supply parts and materials for car repairs and maintenance are in a prime position to earn big profits from those who are desperate to keep their vehicles running. Dorman Products (NASDAQ:DORM) isn't a well-known name among consumers, but the parts supplier is a key player in the auto industry, with its distribution network including well-known auto-parts retail stores as well as direct-to-repair shop distributors. Moreover, by focusing on hard-to-get parts, Dorman has set itself apart from many of its competitors. Coming into Wednesday morning's fourth-quarter financial report, Dorman investors wanted to see if the company could keep benefiting from strength in the auto industry, but Dorman's results reflected some one-time events that involve short-term financial hits in exchange for longer-term benefits. Let's take a closer look at Dorman Products and how its quarter went.
Dorman deals with conversion costs
Dorman Products' headline results didn't look all that impressive. Revenue climbed just 2% to $174 million, well below the $186 million that investors were looking to see, and earnings per share fell 7% to $0.52 compared to the year-ago quarter. Yet Dorman blamed just about all of the shortfall during the quarter to its pre-enterprise resource planning system conversion, which cost 7 percentage points of revenue growth and would have resulted in adjusted earnings per share of $0.63, higher than the $0.59 per share that shareholders expected.
For the full 2014 year, though, Dorman had better success. Revenue climbed 13% from 2013 levels to $751.5 million, and earnings per share of $2.49 were 11% higher than the previous year's results. The company also managed to cut its overhead costs as a percentage of its sales by half a percentage point, and Dorman introduced almost 1,300 of its trademark "formerly dealer only" parts during the year.
CEO Steven Berman noted some other factors that led to sluggish results for the fourth quarter. "The sales growth rate in the second half of 2014 was negatively affected by softer order patterns from two customers that chose to reduce inventory levels," Berman said, and "[g]rowth rates for the rest of the business were in the low teens, which were down slightly from historical levels."
A rough road ahead for Dorman?
Moreover, Dorman could face additional difficulties to start out 2015. The company saw growth of roughly 20% during the first half of 2014, and so building on that past success will be particularly difficult. Berman also cited additional costs from the rollout and transition to the new ERP (enterprise resource planning) system, and although he said that "benefits from our investments in the business" would contribute to long-term double-digit sales and earnings growth, ERP implementations costs "will be meaningful through at least mid-year."
Shareholders can take heart in the fact that Dorman remains committed to sharing its success with investors. During 2014, Dorman bought back more than 855,000 shares of stock, spending an average of $47.20 per share for a total of $40.4 million. With almost $60 million left in its share-repurchase authorization, Dorman will likely proceed with further buybacks throughout 2015.
Moreover, Dorman's strategy of focusing on certain kinds of auto parts makes it a more promising pick than some of its competitors. Specifically, Dorman prefers to make parts that vehicle owners need, rather than those that are merely optional and aren't integral to the safety and smooth operation of the vehicle. Given the tendency toward longer car ownership, Dorman's attempt to pinpoint the most critical needs of its customers should pay off in the long run.
Dorman's results won't necessarily inspire confidence among short-term traders, especially those who don't typically follow the stock. As part of the company's ongoing long-term strategy, though, Dorman's fourth-quarter performance is consistent and marks another milestone in its ongoing attempt to bolster future growth.