WD-40 Slips on Lowered Forecast

Shares in the lubricants maker fell Tuesday after it tempered its full-year earnings outlook

WD-40 (WDFC) sprayed a dose of bad news to investors on July 10. The maker of WD-40 and 3-IN-ONE Oil lubricants, as well as 2000 Flushes, Carpet Fresh, and Spot Shot household cleaning products, reported third-quarter earnings that failed to meet Wall Street's forecast, and also tempered its outlook for the full year.

The San Diego-based company said third-quarter (ended May 31) sales increased 6.2% to $77.6 million, driven by higher lubricant sales, while household product sales fell. Strong sales in Europe and Asia helped offset weak sales in the U.S. Third-quarter earnings per share came in at 44 cents, vs. 42 cents a year ago and below many analysts' estimates. Net income for the third quarter rose 8.5% to $7.6 million.

For its fiscal year 2007 (ending Aug. 31), WD-40 projects net income of $29.1-$30.2 million, amounting to EPS of $1.70 to $1.75. Revenue is expected to rise 7%-9% to $307-$313 million, reflecting the impact of the company's move to open direct operations in China. Results from the first year of direct operations in China are expected to reduce net income in 2007 by approximately $0.6 million, or 4 cents per share, it said.

"We are pleased with the sales growth in Asia-Pacific and Europe driven by our lubricants and household products brands," said Garry Ridge, WD-40 president and CEO, in a release. "We have achieved strong sales increase in Australia, the Asian region, and across Europe through a combination of new distribution, expanded distribution, and new product growth. While those markets continue to show promise, we are also facing ongoing challenges in our household products business in the U.S."

One challenge: It costs more to make its lubricants and cleaners. Gross margins in the quarter fell to 47.5% of sales, from 48.5% in the same period a year earlier. "We continue to be concerned about rising costs of components and raw materials," Ridge said in the release, "and we are working to improve our gross margin over time."

WD-40 shares skidded 6.8% to $34.46 on heavy volume on the Nasdaq on July 10. The stock has traded in a tight range of $30.56 to $37.86 during the last year.

Standard & Poor's equity analyst Loran Braverman says the company's third-quarter EPS shortfall came primarily from lower sales in the household products segment, particularly in the U.S., "which management attributes to changes in promotions, competitive factors and a lower level of innovation." But he noted that sales of lubricants increased almost 16% worldwide.

Braverman kept a hold opinion on WD-40 shares, but lowerd his EPS estimates for fiscal year 2007 by 9 cents to $1.71 and for fiscal year 2008 by 6 cents to $1.90. In turn, he cut his blended p-e- and discounted cash flow-based 12-month target price by $1 to $36. (S&P, like BusinessWeek, is owned by The McGraw-Hill Companies [MHP].)

For more than four decades, WD-40 sold only one product: petroleum-based WD-40 -- the No. 1 brand of spray lubricant in the U.S. consumer market, according to an S&P report. Since 1995, the company has acquired brands including 3-IN-ONE Oil, the Lava and Solvol heavy-duty hand cleaners, the X-14, 2000 Flushes, and Carpet Fresh household cleaners, Spot Shot carpet cleaner, and the 1001 line of carpet and household cleaners for the U.K market. The company believes its products complement one another, providing lubricant and heavy-duty hand cleaning products aimed at the do-it-yourself hardware, automotive and other retail and industrial markets, says S&P.

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