D-Keine
WD-40 Company (NASDAQ:WDFC) stock valuation has been stretched for years. After now falling over $100 from highs or about 40%, shares are now at levels not really seen since 2018. All the growth has been erased.
Folks, this has been a stock that slowly grew over the years and paid a handsome dividend that continued growing. This pullback has been strong. The fundamentals of the company are weakening in this environment. But it is a horrible environment for most companies. The thing is, even with this huge pullback the stock is still expensive. We have long owned shares. This is one of our oldest positions. It has long been priced for rapid growth, but now the growth has slowed to a crawl. We continue to hold, but it is going to take a better market and better global conditions for the stock to resume its run again.
However, after a 40% decline to 2018 levels, the stock is certainly becoming more compelling, if history is a guide. But to get an attractive value, the stock really needs to fall another 20% or so, where we would be buyers. For now, it’s a hold.
Performance of the company, while admirable, even with the pressure on companies globally, just does not justify the premium. WDFC stock has been priced for rapid growth for years now. But the market seems to be letting the concept of extreme valuations go, as evidenced by this selloff following the just reported earnings. We think the stock will fall sub-$150 here, as it returns to levels not seen in several years. In this column, we discuss the strengths and weaknesses of the quarter.
Top-line growth
Make no mistake, watching a long-term position fall like this is no fun. We always trade around a core position, selling on big rises, buying more when it falls, and doing some options premium trading as well on positions. For a long-term holding, we want to see regularly increasing sales.
Right now, sales are growing, but there is pressure. Comps are key, too. There are higher input costs and selling expenses, but the company does have pricing power. On an absolute basis, sales for the fiscal fourth quarter were $130.4 million, up a nice 13% from the $115.2 million last year. We were expecting sales around $130-133 million, so this was at the lower end of the range. This also missed consensus by $0.68 million. We believed the company’s lubricating products would sell just fine online and that brick-and-mortar sales would rebound and they did. There were also interesting regional trends to be aware of.
International business continues to do well, but currency issues weigh heavily
WD-40 has long had a thriving and growing international business. If we look at the sales on a constant dollar basis, net sales for the quarter were much higher. Controlling for currency, sales were up to $137.1 million overall, which were still up 17% from last year. Sales of its products were strong, but the U.S. Dollar is just hurting revenue for companies with big international sales.
Look, there are now over 170 countries the products are sold in, some markets may overperform, while others may underperform, so the overall international sales have grown but there are occasional weak patches, and of course, this dollar being so strong, it hurts. But we are seeing growth in the Americas and Asia-Pacific, though sales fell in Europe (or EMEA) mostly due to currency issues. Overall, net sales by location for the quarter were 52% in the Americas, 34% in EMEA, and 13% in the Asia-Pacific region.
Sales in the Americas increased 25%, driven by a solid 79% boost in Latin American sales. Sales were up 41% in Canada, and they increase 16% in the U.S. This was strong growth, and the company was both promotional while also increasing their prices. The company has also seen supply chain improvements too, which helped. Net sales in EMEA dropped 3%, which was primarily due the strong dollar. If we control for the dollar, sales were up 10%. Colmes remain strong as well, though not nearly as strong as when COVID-19 was highly problematic. In Asia-Pacific, sales were up 14% from last year. On a constant dollar basis, Asia-Pacific would have increased by 22% compared to the prior year mostly on the back of higher sales of maintenance products in the Asia-Pacific distributor markets, as well as cleaning products in locked down areas of this region due to COVID-19.
Margins weakened
The current inflationary environment has severely disrupted the company’s ability to maintain and achieve its 55% gross margin target. There is just too much pressure including labor, input costs, and administrative costs, though the company gas worked to decrease its selling costs. That said, Q4 gross margin was 47.4% compared to 51.0% in the prior year fiscal quarter. There was actually a nice 11% decrease in selling, general and administrative expenses. These were $31.8 million when compared to the prior year fiscal quarter. For the whole fiscal year general and administrative expenses were down 5% to $138.7 million compared to the prior year fiscal period.
Putting it all together, net income did a lot better this year, rising 77% to $14.8 million, with earnings per share of $1.08, versus $0.61 last year. While that was welcome, fiscal year earnings were down to $4.90 per share from $5.09 last fiscal year. Meanwhile, the stock has collapsed, but management is working to right the ship.
Looking ahead
With disappointing numbers this year for margins, management has a margin restoration plan in place, focused on getting margins back up to the low and mid-50% range. We expect sales to grow in fiscal 2023 by 10% with currency being a wildcard, though management sees growth of 5-10% for the year. If margins rebound, we are looking for at least 50% for the year, though management forecast 51-53%, on the belief its plan will boost margins again.
The company is also repurchasing shares which helps EPS, having repurchased another $29 million of shares. All told, earnings growth should resume in 2023, with estimates of $5.09-$5.24 for EPS. Shares have fallen due to valuation and the outlook showing minimal growth despite plans to improve. For now, we view the stock as a hold.
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