WD-40 Company (NASDAQ:WDFC) is one of my favorite household names. Make no mistake, many of us use its products regularly. I rely on them, particularly in spring when it's time to start greasing up the garage tracks, the sliding glass patio door, loosening up the bike chains for the kids, etc. No doubt, the company is a family name, having been around since 1953, and in 2014, I wrote about it being a buy-and-hold success story.
As long as products require lubrication, the company will always have a market for its flagship multi-purpose maintenance products under the WD-40 brand. I don't see the company going anywhere anytime soon. In fact, I see continued and growing demand for its products. While the last year has seen its ups and downs, given the long-term trajectory of the company and the stock (figure 1), I won't let a few bumps in the road deter my view of the company. That said, while some of the headline numbers were certainly weaker than I would like in past quarters, digging deeper we saw that this was just noise. And now, the company just released its Q2 earnings, and the headline numbers show a revenue miss, but a bottom line beat. So what is going on here?
Figure 1. Five Year Price History of The WD-40 Company
With the somewhat so-so nature of the headline earnings, the stock is down a bit on the news. So what is the deal here with the revenue miss? Well once again sales for the quarter were impacted by currency issues. On an absolute basis, sales for the third quarter we $94.6 million, down 3% year-over-year. It missed estimates by $4.55 million. Ouch. This is becoming a bit of a pattern lately. The company is missing on sales estimates more often than not. Now, what I want to point out however is that if we look at the sales on a constant dollar basis, net sales for the quarter would have been $97.5 million for the quarter. That is up a million plus quarter-over-quarter on a constant dollar basis.
As you can see, when you back out the currency issues, the sales picture isn't as bad as the bears would have you believe, but a miss is still a miss. Thus Wall Street is punishing the stock for this quarter after the recent run-up in price. Why is that? Well how about the earnings picture? Well here things looked strong as earnings were a beat versus analysts' estimates, but are they rising? The answer is yes. Net income jumped 21% to $13.7 million compared to last year's quarter and earnings per share came in at $0.94, beating estimates by a strong margin of $0.08. This is a strong year-over-year increase and the company is heading in the right direction.
The best news out of this quarter, and one of the keys to this company I cited when I first highlighted the company, is of course its margins. I had called for margin improvement when I first covered the company. This was because I felt the company would effectively reduce its input costs while managing price increases. Well, this has been the pattern the company has followed. Gross margin widened once again in Q2 to 55.4% from 52.6% last year. This is up from the 54.3% in Q4 and is also up from the 53.3% in Q3, but a very tiny downtick from the 55.6% last quarter. Still the margins are excellent and you need to be aware of this. Margin expansion like this for such an established company is impressive. One of the big drivers of this increase in margins was a decline in the growth of expenses. In this quarter administrative expenses were up 5% to $28.7 million versus last year, but advertising expenses were down 9% to $5.0 million. Overall, the company performed within my expectations. Garry Ridge, president and CEO, stated:
Our second quarter results are a true reflection of the diversity of our business across geographies, trade channels and economies. Foreign currency exchange rate fluctuations continue to negatively impact our reported sales. When we compare sales to last fiscal year's second quarter our European markets, in particular, continue to be heavily impacted by the weakening of the euro against the pound sterling as well as the strength of the U.S. dollar. On a more positive note, WD-40 Specialist grew 20% globally during the second quarter and I continue to expect it will provide the Company with many long-term growth opportunities.
Now that is realistic commentary, acknowledging where the weakness is stemming from but highlighting the strength of the growth in segment specific areas. However, I think what we are witnessing right now is most certainly temporary. Currency issues are real, with 40% of sales coming in different currencies. The strength of the dollar is a real threat to domestic companies doing a lot of business overseas. That said, the company still continues to slash costs and focus on margin improvement. I like that for the most part there is growth in most segments. Keep in mind that the company is incredibly shareholder friendly. The company has a nice share repurchase plan. It has been authorized to buy up to $75.0 million of its outstanding shares through August 31, 2016. From March 1, 2015 to February 29, 2016, the company has bought back 347,582 shares at a total cost of $30.8 million. Recall the company recently hiked its dividend once again. In fact, it raised the dividend 11% to $0.42 quarterly. That is the reason we own a stock like this. Slow long-term growth with dividend hikes along the way.
Looking ahead I expect slow and steady growth, coupled with the continued shareholder friendly policies. Thus I maintain a buy rating. The market has been pulling back and I think if this one drops further than you can put in some well-timed buy orders.
Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "Follow." He also writes a lot of "breaking" articles, which are time-sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.