When I saw the headline yesterday afternoon trumpeting 33% net income growth in WD-40's
Not that it's impossible for a company like WD-40 to grow that quickly for a quarter or two, but a certain number of things have to fall in place for such high growth to be possible. The preferred path to such strong gains is to cut costs at both the cost-of-goods-sold and operating-expense levels. Less desirably, you could also boost net income with a one-time gain.
Once you read through the fourth and fifth paragraphs of the press release, it's apparent that the company's cost of goods sold is actually rising, due to increasing raw material costs. There were no one-time gains, either.
That leaves a reduction in operating costs, which the company accomplished by cutting back on advertising expenses. However, the reduction appears to be only a timing issue, with expenses deferred until later quarters. On the company's conference call, management said that it expects advertising expenses for the full fiscal year to be 7.5% to 9.5% of sales, which roughly matches last year's 8.7% first-quarter advertising spending and significantly tops this quarter's 5% figure.
Adjusting this year's first-quarter advertising expense of $3.3 million to match last year's $5.3 million knocks the company's net income growth down from 33% to 11.3%. That's still solid growth, and the company did increase its sales by 10.8% year over year. The sales gain also coincides with recent sales trends for consumer-products companies Clorox
You could make a fair argument that WD-40's stock was slightly undervalued prior to today's run-up, and this past quarter's 10.8% sales improvement suggests that the company remains healthy and capable of future growth. Nevertheless, looking at the sales gain, a similar gain in operating profits (after normalizing advertising expense), and a slight decrease in free cash flow, I have a hard time understanding why the market bid the shares up as much as 11% in midday trading today. Then again, not everything in the market makes sense, and I'm not a big believer in market efficiency to begin with. Days like this simply reinforce that opinion.
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