The WD-40 Company Bottoms With Reversal In Sight

Key Points

• The WD-40 Company falls on tepid guidance expecting an acceleration in H2. 
• The company is buying back shares and has a fortress balance sheet. 
• Institutions are buying and have put a bottom in the price action. 

The WD-40 Company NYSE: WDFC is facing headwinds like the rest of the market, but it is in a position to unstick the cogs of profitability and send its stock into a reversal. The company has been wrestling with inflation, supply chain issues and the need to raise prices which have impacted sales. The guidance for the year was lowered because of it, but the new guidance is consistent with expectations and coupled with an expected acceleration of business in the back half of the year.

The business acceleration is expected to include wider margins and lower SG&A expenses, which could also lead to outperformance. 

“While sales volumes in the second quarter were lighter than we anticipated, we continue to believe that most of our growth this fiscal year will be weighted toward the second half of the year,” said Steve Brass, WD-40 Company’s chief executive officer. “I am pleased to report that we have now made it through most of the price increase-related disruptions and the prospects for revenue growth in the back half of the fiscal year are looking optimistic. I am happy to report that it’s looking like the month of March, though not yet fully finalized from an accounting perspective, will be a new record sales month for the company.”

The WD-40 Company Is On Track For A Record Year 

The WD-40 Company had a good quarter delivering growth and results above the Marketbeat.com consensus. The $130.19 million in revenue is up 0.2% compared to last year, beating the consensus by 350 basis points. This includes a 400 basis point headwind from FX conversion and the exit from Russia/Belarus.

The Americas grew by 15% on a regional basis due to price stabilization and demand, while APAC and EMEA fell by 4% and 12%. The core Maintenance Products group and the legacy harvest household cleaning products group were flat on a segment basis. 

The margin news is mixed but ultimately bullish for share prices. The gross margin improved by 40 basis points YOY while SG&A expenses increased 8% and Ad&Promo spending by 7% to more than offset the gain. The good news is that the operating margin exceeded expectations to drive GAAP EPS of $1.21 or $0.20 better than expected. 

The guidance is positive but not a catalyst for higher share prices today. The company lowered the range for revenue and earnings but slightly to a level bracketing the analyst's mid-point targets. Regardless, the guidance calls for revenue and earnings accelerations to put the top line at record levels and the bottom line very close. 

The Institutions Put A Bottom In The WD-40 Company 

The institutional activity has been mixed over the past 12 months, but the balance of activity is bullish; they own about 92% of the company, and all of their activity in Q1 was buying. This put a bottom in the stock at the $160 level and it is trending higher in 2023. The post-release reaction was to sell the shares, but the move did not go below key support at the $160 level.

The price action is, in fact, still above the $170 level and may find support at this price point. Assuming the market buys on the dip, the chart will be set up for Head & Shoulders, which could result in a reversal. Until then, there is a risk the market will fall to the $160 level or lower, where support is expected to be robust.