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3 Things the WD-40 Company Wants Investors to Know

Asit Sharma, The Motley Fool

Venerable lubricants manufacturer WD-40 Company (NASDAQ: WDFC) followed up an exceptional 2018 for its stock with a credible first-quarter fiscal 2019 report, which it released on Wednesday after the markets closed. In the three-month period ended Nov. 30, 2018, revenue rose 4% over the prior-year comparable quarter to $101.3 million, and diluted earnings per share advanced 5.5% versus the first quarter of 2018, to $0.90.Let's review three significant comments made by management on the company's earnings conference call that provide context on WD-40's prospects for the current fiscal year.

A core product enjoyed moderate expansion during the quarter

Strategic initiative No. 1 is to grow WD-40 Multi-Use Product. Our goal under this initiative is to make the blue and yellow can with the little red top available to more people in more places who will find more uses more often.
-- CEO Garry Ridge

WD-40 Company aims to achieve $700 million in annual revenue by 2025. Given fiscal 2018 revenue of $408 million, the company will need to achieve a compounded annual growth rate of 8% over the next six years. That's a slightly higher pace than the 7% year-over-year revenue increase the organization booked last year. It also indicates future acceleration over projected current-year top-line growth of 4% to 7%.

The path to $700 million will be cleared by the iconic product most of us associate with the company, its WD-40 Multi-Use household product line. During the first quarter, sales of WD-40 Multi-Use expanded by 5% year over year to $78.3 million. This equates to more than 77% of total company sales during the last three months. 

For the corporation to meet its 2025 objective, WD-40 Multi-Use will itself need to maintain an annual growth rate of at least the mid-single digits. Wider distribution of WD-40 Multi-Use will be supplemented by sales of the smaller but faster-growing WD-40 Specialist line, which is geared toward commercial users. This product line recorded $8.3 million in sales in the first quarter, an improvement of 13% against the first quarter of 2018.

Two pinions are lubricated with a drop of oil from a test tube.

Image source: Getty Images.

More efficient research and development

[W]e continuously focus on optimizing resources, systems, and processes while applying a rigorous commitment to quality assurance, regulatory compliance and intellectual property protection...I'm really excited to share with you that this month, we'll be opening our brand-new technology center in Pine Brook, New Jersey.
-- CEO Garry Ridge

Alongside its long-term revenue target, WD-40 strives for an operational objective it terms "55/30/25." This translates to 55% gross margin, 30% "cost of doing business" (defined as total operating expense less adjustments for a few noncash expenses, divided by sales), and EBITDA of at least 25% of sales. Above, CEO Garry Ridge mentions a new initiative that should help bolster each of these metrics.

Ridge informed investors on the call that the new Pine Brook facility will allow the company's research and development team to conduct laboratory testing in house. This represents a potentially significant leap in research efficiency, as the WD-40 Company has traditionally outsourced most of its laboratory-based testing.

This should benefit the corporation in speeding up development cycles (and thus improving margins). But it should also greatly enhance WD-40's ability to innovate and further expand its secondary "maintenance" product line, which includes brands like WD-40 Bike, Spot Shot, Lava, and 3-In-One.

Minimizing the impact of rising costs

The average cost of raw materials that flowed through our cost of goods in the first quarter was higher this year compared to the first quarter last year, which put pressure on gross margin in all three trading blocks [i.e., the Americas, EMEA (Europe, Middle East, and Africa), and Asia-Pacific].
-- CFO Jay Rembolt

During the first quarter, the WD-40 Company's gross margin dipped by 0.4 percentage points against the comparable quarter to 55.1%. The commodity and materials cost increases that CFO Jay Rembolt refers to above occurred primarily in aerosol cans, which produced a drag on gross margin of 0.4 percentage points, and petroleum-based specialty chemicals, which negatively impacted gross margin by 1.6 percentage points.

The corporation was able to offset most of this total of 2 percentage points of gross margin decline through price increases instituted across its three geographical regions over the last year. The price realization accounted for 1.2 percentage points of positive margin impact, and the company gained another 0.4 percentage points of relief via higher sales volumes and lower inbound freight costs.

WD-40's pricing actions demonstrate its commitment to holding fast to the "55" portion of its 55/30/25 business model. And at the outset of the new fiscal year, the gradually phased-in price hikes have allowed management to shore up its forward financial projections. Looking forward to the rest of the fiscal year in its earnings release, the company reaffirmed its full-year projected earnings range of between $4.51 and $4.58 per share.

 

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.