Forget retailers complaining about higher fuel prices affecting sales. I know it's a real impact, but it's nothing compared with the kind of cost squeeze WD-40 (NASDAQ:WDFC) is experiencing. Try running a consumer products company where your key products are made from petroleum and steel, two raw materials that have experienced significant cost increases over the past year.
The company reported third-quarter earnings after the market closed yesterday. Revenues rose 9.1%, with solid progress across all geographies. North American sales gained 7.2%, while Europe was up 12.5% and Asia/Pacific climbed 14.4%. Not bad for a stable of ordinary household products including the namesake WD-40, 3-in-One Oil, Lava hand cleaner, and 2000 Flushes. Compare that to recent single-digit sales gains at such well-known consumer product companies as Clorox (NYSE:CLX), Procter & Gamble (NYSE:PG), and Kimberly-Clark (NYSE:KMB). Old WD-40 is clearly making some headway.
The earnings side is where the squeeze is happening. Gross profit dollars were flat with the same quarter last year, on a 3.7% increase in cost of goods sold as a percentage of sales. That's big-time, folks. The company held the line on SG&A and advertising costs, allowing it to eke out a 4.8% increase in net income.
While making no excuses about its performance, WD-40 warned that until it sees some relief on the cost side, it can pass through only modest price increases. Hence the fourth quarter is likely to show approximately flat earnings, with the full year looking like $1.50-$1.55, compared with $1.50 last year.
For more than four decades, the company sold only WD-40. By the way, the name comes from the product's 40th formulation, which became the universal fix-it solvent we know and love today. Back in 1995 it began a series of acquisitions, bringing the brand stable up to nine core products today. Most consumers will find at least one of its products in their garage, under their sink, or in their toolbox. The company is seeking additional acquisitions that fit its manufacturing and distribution pipeline.
I'm sure you'll be pleased to know that two improved versions of WD-40 are moving into launch phase, one with a Smart Straw and the other with a No-Mess Pen. There's even a WD-40 fan club with its own website. It's free to join, although you have to register. There you can find 2,000 innovative uses for the product; a club member in Pennsylvania, for example, swears that WD-40 is the cheapest and best lubricant for keeping grandfather clocks happily ticking away.
Back to the numbers. The company noted on its earnings call that if cost increases had not cut into margins, a flat gross profit percentage with last year would have yielded nine-month YTD earnings of $1.27, a 31% increase over the prior year. As my father frequently reminded me, "If wishes were horses, beggars would ride." At a trailing P/E ratio of 19 and a PEG ration of 2.1, the stock is not cheap. On the other hand, its products will continue to be consumer staples, and fuel prices are bound to come down eventually ... sometime ... maybe ... I think.
Interested in a closer look at WD-40? Read the articles below, or check out a transcript of Tom and David Gardner's interview with CEO Gary Ridge back in 2002.
Fool contributor Timothy M. Otte can't remember a time when he didn't have a can of WD-40 in his garage. He welcomes comments on his articles but doesn't own the stock of any company mentioned in this article.
