"Oil-Dri (NYSE:ODC) Reports Record First Quarter Sales and 71% Increase in First Quarter Earnings Per Share," blared the headline. So why, pray tell, has the stock of this cute little kitty-litter maker declined 4% since the news came out? The maker of absorbing products couldn't have "missed estimates" after all -- because there weren't any. What gives?
Here's what gives
Let's break this down into the good and the bad points. Good first:
- Quarterly sales were up 9%.
- Gross profit margins on those sales grew 290 basis points compared to fiscal Q1 2006.
- Profits, at $0.24 per share, were up the aforementioned 71%.
- Helping to boost profits per share was the fact that Oil-Dri reduced its diluted share count by nearly 5% over the last year.
Now the bad:
- Sales on the business-to-business side of the, er, business showed essentially no year-over-year growth.
- Inventories grew faster than sales at 12% versus this time last year.
- Free cash flow ran negative to the tune of $0.3 million for the quarter. No surprise there, however, because Oil-Dri has burned cash in the first quarter of every fiscal year for the past decade, save two (2000 and 2002).
And now some more good:
- Usually, the firm makes up the difference on its negative Q1 free cash flow, and then some, in fiscal Q2.
- The retail side of the business grew its sales 14% year over year.
- Retail sales gains (primarily of cat litter) were driven by both higher unit sales and higher prices charged per unit. Not bad when there are competitors such as Church & Dwight (NYSE:CHD) and AmcolInternational (NYSE:ACO) in this space.
- And remember that 12% inventory growth that I mentioned as a "bad" thing above? Well, in my Foolish Forecast previewing Oil-Dri's earnings news, I pointed out that inventories had been trending toward 21% growth over the last six months. So while 12% remains higher than we'd like to see, inventories are moving in the right direction: down. (Categories such as raw materials and work-in-process don't really work for this business, so we can only look at total inventory.)
Considering the above, I disagree with Mr. Market's reaction so far to Oil-Dri's news -- I think it did just fine. I did receive one reader comment, to the effect that Oil-Dri's business selling sorbents to control machine oil spills within the U.S. metalworking industry will suffer as these kinds of businesses move offshore -- and the flat sales growth in Oil-Dri's B-2-B business supports this view. But judging from last week's results, the firm is more than making up for that on the retail side.
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Fool contributor Rich Smith does not own shares of any company named above.
