WD-40 is a "Fortress of Brands" (its words, not mine). In the U.S., besides the namesake, they include 3-IN-ONE, Lava, X-14, 2000 Flushes, Carpet Fresh, and Spot Shot -- all names found around the house and in the garage. The company says its focus is simple: It is in the squeak, smell, and dirt business. Cute!
In October 2003, the company's five-year plan was to grow revenue at an annual rate of between 6% and 8%. Net income would slide ahead at a more robust 8% to 11%. That sounds great, but fiscal year 2004 (the first year of the plan) saw sales increase 1.8% and net income slip 10.5%.
The CEO sees it this way: "We had a good start to our year and are in line with meeting our expectations." Those earnings hardly look "in line" to me. The company attributes the poor income numbers to the cost of some raw materials (such as steel and oil) and the costs of complying with Sarbanes-Oxley. Saving the day, in their book, will be price increases; the company expects to increase prices and bring two new products to market.
The company's story is a strong one. There are nine leading brands that are sold in 160-plus countries. These products are sold everywhere -- from mass marketers, such as Wal-Mart
A somewhat austere evaluation of WD-40's business climate reveals several innate and self-evident truths. First, it doesn't seem too unreasonable for the company to experience earnings declines given the business climate within which it operates -- raw materials make up a relatively significant part of total costs, and distribution/manufacturing costs are affected by oil prices. Second, and perhaps more important, is the question that intuitive (and intelligent) Fools must ask themselves. Where is the growth coming from? WD-40 already resides within somewhere around 80% of all households, and demand for household goods of this sort is generally inelastic (translation: These are not high-growth markets). The answer: acquisitions.
Related business/product acquisitions allow the company to diversify into areas where it has already built managerial expertise. The company experiences earnings growth via addition of "x" product's sales figures and lengthening distribution channels to Asian and European regions not yet penetrated to the same degree.
This should enable earnings growth on a consolidated basis, but given the relative lack of demand elasticity, it is difficult for me to see earnings growth via any other method, and the recent earnings release is somewhat reflective of prospective difficulties. WD-40 is a fundamentally strong business, but it's difficult to see the company meeting its five-year growth targets without another run to the acquisition store.
Fool contributor W.D. Crotty owns stock in WD-40 and uses its products regularly. W.D. (no, not WD-40) does not own shares in any of the other companies mentioned. Click here to see The Motley Fool's disclosure policy.