WD-40 (WDFC) reported Q3 2023 earnings Monday after the close. Not only were its sales and profits higher year-over-year, but they also beat analyst estimates for the quarter. Further, the company confirmed its guidance for the rest of the year.
As a result of the good news, WDFC stock is up nearly 19% mid-way through Tuesday trading. Hitting a 52-week high of $234.69 in morning trading, the company’s stock is now up 41% in 2023.
It’s on a big roll and could be ready to push into the $300s, where it traded in 2021. Here’s why.
What’s the Good News?
Overall, WD-40’s revenue was $141.7 million, 14.6% higher than a year earlier and $3.3 million above the consensus estimate. On the bottom line, it earned $18.9 million, 30.3% higher than $14.5 million a year earlier and 16 cents higher than the consensus estimate.
Equally important, it reiterated that it expects to earn $4.90 a share at the midpoint of its guidance in 2023, on revenue of $547.50 million.
“I am happy to share with you that after two quarters of flat-to-down sales, we have returned to solid top-line growth in the third fiscal quarter,” said Steve Brass, WD-40 Company’s president and chief executive officer.
“On a constant currency basis, global sales were up 18 percent in the third quarter and 7 percent year to date. We target a compound annual growth rate for maintenance product revenue in the mid-to-high single digits on a constant currency basis. Achieving year to date growth of 7 percent in constant currency is in-line with our long-term objectives.”
The company’s Americas segment, which accounts for 50% of its revenue, delivered a healthy 16% increase in third-quarter sales. However, its Asia-Pacific business really stood out this past quarter with a 42% increase in sales to $18.1 million, or 12.8% overall, up from 10.3% a year earlier.
The sale of its maintenance products, such as WD-40, increased by 151% in its Asia distributor markets. These are markets where the company doesn’t have its own operations. Its distributors sell to wholesalers, who sell to the end retailers. In addition to its Asia distributors, its sales in China increased by 38%.
As the Chinese economy continues to rebound, expect WD-40 to generate significant sales from China.
What’s the Bad News?
Buried under all the good news from the quarter is that with one quarter left in fiscal 2023, it expects to deliver results at the bottom of its guidance.
Assuming it generates $535 million in revenue and $4.8o in profits in fiscal 2023, topline sales would be the highest in its history, while bottom line income would be equal to or lower than 2022 and 2021.
As it finishes out 2023, its biggest weakness is a lower gross margin than it’s historically generated. Between 2016 and 2021, it averaged a gross margin of 55.2%. It’s calling for a gross margin between 51% and 52% in 2023, more than 400 basis points lower than the six-year average through 2021.
The good news is that it implemented price increases in 2023 to offset the rising cost of goods due to inflation. As prices continue to moderate in the year's second half and into 2024, its gross margins should return to historical norms, sending more to the bottom line.
The Bottom Line
Looking through the company’s Q3 2023 conference call transcript, I see plenty to like about WD-40’s current business.
For example, excluding currency, its sales increased by 18% year-over-year, approximately 300 basis points higher than reported. Its sales volumes in Asia-Pacific increased enough to offset volume declines from the Americas and Europe, the Middle East, and Africa. Further, excluding currency, China's sales increased by 50% during the third quarter, 12 percentage points higher than the reported increase.
CEO Steve Brass discussed in the call its 2025 goals set a decade ago that projected revenues of at least $650 million. The war in Ukraine and foreign currency headwinds have made it abundantly clear that it will not meet those ambitious goals.
In addition, it plans to pour all of its energy into its higher-margin maintenance products like WD-40 and 3-in-One, while de-emphasizing its homecare and cleaning brands, which account for just 6% of its overall sales.
As for its emphasis on its maintenance products, it plans to grow these sales by 5-9% annually, excluding currency, over the long haul.
“The bulk of that growth is expected to come from sales of WD-40 Multi-Use Product to geographic expansion, increased penetration, premiumization, and supported by our continued investment in digital commerce,” Brass stated.
“... Our largest growth opportunity and first Must-Win Battle is geographic expansion of the blue and yellow can with a little red top.”
Despite the big gains in 2023, virtually every valuation metric suggests that WD-40’s stock is reasonably priced relative to its five-year average. For example, WDFC trades at 5.01x sales, 20% less than its five-year average of 6.18x.
The saying, “An object in motion stays in motion,” applies to WD-40’s stock. In February 2021, WDFC hit an all-time high of $333.42. Barring a recession, it will head back there in 2024 or 2025.
If you can hold for 2-3 years or longer, WDFC remains an excellent buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
