Inflation Headwinds Cut Deep Into WD-40 Company Results
WD-40 Company (NASDAQ: WDFC) is a great growth story and one that we have been avidly following for the last 2 years or so. The company has been working hard to expand its reach, deepen its market penetration and grow both the top and bottom lines. Those efforts had been paying off in spades until the global supply chain crunch hit and now the headwinds are blowing strongly. Not only was quarterly revenue impaired but so too were margins and earnings. The silver lining for investors is that volatility in sequential results and increased spending are also to blame. Longer-term, the company's growth trajectory remains intact the only question is when and if WD-40 company will be able to overcome inflationary pressures. Until then, the company remains a very safe dividend grower and is trading at a deep discount relative to its recent highs.
"The dynamics of the pandemic continue to create abnormal swings in our net sales results from period to period. Despite this quarterly volatility, we continue to see strong end-user demand for our maintenance products across the globe and we remain optimistic that many of the new end-users who have interacted with our brands during the pandemic will become permanent users of our maintenance solutions."
Mixed Results Sap Sentiment For WD-40 Company
WD-40 Company had a good fiscal fourth quarter as far as revenue goes but there are two underlying issues that sapped investor sentiment. The first is that revenue missed the Markebeat.com consensus by 190 basis points and likely wouldn't have if not for the impact of supply chain disruption in America's segment. The other is that FX tailwinds and currency translation from its international units added 7.2% to the revenue. In that light, the revenue of $115.20 million or growth of 3.2% isn't all that impressive. On a category basis, the core maintenance product segment grew by 4% while the home and cleaning products segment was flat over last year. On a regional basis, growth was led by a 32% gain in the APAC region followed by a 6% gain in the EMEA region. Sales in the US fell by 5%.
“Although demand for our maintenance products in the United States remained strong in the fourth quarter of this fiscal year, we were unable to meet this demand due to continued supply chain constraints and disruptions related to the COVID-19 pandemic.”
Moving down to the income portion of the statement, the company reported a 510 basis point contraction in gross margin to 51.2%. In addition, SG&A expenses and add-spending were all higher. SG&A increased by 14% while promotional activities and advertising increased by 61% to help drive a 57% decline in net income. The silver lining here is that the $16.30 million in advertising and promotional spending is more than enough to make up the revenue difference and offset the effects of FX tailwinds, and will ultimately lead to increased revenue and earnings down the road. As far as EPS goes, the company reported $0.61 in GAAP earnings which is slightly more than 50% below the consensus estimate.
Guidance Is No Help For WD-40 Company
WD-40 Company gave us some very favorable guidance in terms of its revenue and is expecting growth in the range of 7% to 11% over fiscal 2021. That puts revenue in a range of $522 to $542 million versus the consensus for $517 million. The rub is that EPS is expected in a range of $5.24 to $5.38 versus the consensus of $5.77 but the numbers may not be directly comparable. The company recently announced a buyback program that begins in November so share counts on a model-to-model basis could have wide fluctuations. Regardless, shares of the stock are down 10% in early trading and may fall farther. The caveat for the Bears is that price action is sitting above a key support level where the 10% short interest indicated by Marketbeat.com short interest data may begin closing out their positions.
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