WD-40 Company (NASDAQ: WDFC) is a multi-faceted investment thesis centered on growth and operational quality. The company has worked hard to invigorate growth and improve margins and made another significant step forward in Q2. Not only did the company improve operational quality compared to last year, but it also announced the sale of its harvest segment, which is a bonus for cash, the balance sheet, growth and margin.
The harvest segment is a portfolio of cleaning products sold in the United States and Europe. A small portion of the revenue, the segment is a solid cash generator but not the core of the business. Because of competition and the company's focus on its core business, harvest sales have been flagging and fell 3% in Q2. The sale is yet to be finalized; the company is in the early stages of the process but will remove drag from top-line growth while improving net margin and providing additional capital for reinvestment and capital returns.
What this means for the guidance is good news for investors. The company reaffirmed its outlook for full-year revenue growth at up 6% to 12% while narrowing the gross margin outlook and raising the forecast for earnings. Gross margin should run in the range of 51.5% to 53%, up 50bps at the low end from previous guidance, with GAAP EPS of $5.15 at the mid-point. The new mid-point aligns with the prior high-end and may be increased again later in the year.
WD-40 Company Outperforms in Q2, Improves Balance Sheet and Value
WD-40 Company had a solid quarter in Q2 and delivered results outpacing the consensus reported by Marketbeat. The $139.1 million in revenue is up 6.8% compared to last year, bringing the YTD total to 10%. An FX tailwind added 180bps to the growth. Emerging and developing markets led with a gain of 16%, helped by new markets and deepening penetration. Asia-Pacific grew by 4% and the Americas by 15%. WD-40 Multipurpose grew by 7% on a product basis, led by a 10% increase in Specialists. The "other" segment grew by 9%, and Harvest Brands fell by 3%.
Margin news is good. The company's net income and GAAP earnings fell on a YOY basis due to increased ad-spending and the acquisition of its Brazilian distributor, but the gross margin is up. Gross margin improved by 160bps in Q2 to 52.4%, bringing the YTD improvement to 200 basis points. GAAP results are down but offset by the impact of reinvestment and future profit gains. Still, the $1.14 in GAAP earnings is better than expected and aided significant balance sheet improvements.
There is Nothing Wrong with WD-40 Company's Balance Sheet or Dividend
The balance sheet highlights include a cash build, steady debt/liabilities, and improving shareholder equity. The cash balance is up 15% on a cash-flow positive quarter, assets are up 1%, liabilities are down 1%, and equity is up 3%. The cash flow and balance sheet allow for capital returns, including a dividend and share repurchases.
The share repurchases are strategic and primarily intended to offset share-based competition; the share count is down -0.2% YOY. The dividend is more substantial at 1.4%, which aligns with the broad market average and is reliable. The company pays about 65% of earnings, a relatively high payout ratio, but sustainable given the balance sheet, cash flow and growth outlook. This industrial stock has a solid history of dividend increases and can be expected to increase again at the end of the fiscal year.
The WD-40 Company Falls into the Buy Zone
The price action in WD-40 Company stock fell more than 3% at the open, but early action suggests this is a dip-buying opportunity. The stock began to rebound almost immediately following the opening and may continue to be supported through the session’s end. If so, this stock could continue to rebound and move up to retest recent highs soon. If not, this market may become range-bound below $255 before moving higher later in the year.
