WD-40 Company

Moat: 2/5

Understandability: 1/5

Balance Sheet Health: 4/5

WD-40 Company is a global marketing organization dedicated to creating positive lasting memories by developing and selling products that solve problems in workshops, factories and homes around the world.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: WD-40 Company (WDFC) is not your typical tech darling or a cutting-edge innovator, but rather, a well-established consumer products business with a unique focus on solving everyday problems with its namesake WD-40 and other maintenance products. Its operations are structured into two segments:

  • Americas: Sales and distribution throughout North, Central, and South America.
  • EMEA: Sales and distribution in Europe, the Middle East, and Africa.
  • Asia-Pacific: Sales and distribution in Asia, Australia, and New Zealand.

Revenue Distribution and Trends:

WDFC primarily generates revenue from sales of its multi-purpose maintenance products, such as WD-40 Multi-Use Product and its specialist product lines like WD-40 Specialist and WD-40 BIKE. Other products include home care and cleaning lines, such as 3-IN-ONE and Lava. The revenue is broken down as follows:

  • Maintenance products: This segment includes the multi-purpose maintenance products and specialty maintenance products, with the multi-use product continuing to be the dominant driver.
  • Home care and cleaning products: This segment includes laundry stain removers, carpet cleaners and all-purpose cleaners sold under various brand names.

The company is currently navigating a challenging macro-environment. In the latest fiscal year (ending August 2023), WDFC reported sales of $537 million. The company’s revenue growth is primarily driven by increases in prices as opposed to volume, which is concerning. It’s imperative to monitor whether this is just temporary due to increased inflation and/or if the company is hitting a price wall. The company is also working to expand into emerging markets, where growth rates should be higher.

Margins:

WDFC reports two types of profit margins: gross profit margin, and adjusted EBITDA margin. It has maintained a relatively healthy gross margin. However, due to increased shipping and raw material costs, the margins are trending slightly down. For example, for the most recent fiscal year, gross margin was 51.6% versus 52.8% and the adjusted EBITDA margin was 19.1% against 21.6% respectively. A notable component of this is also supply chain volatility. These are things that must be improved for a sustainable future.

Competitive Landscape:

The competitive landscape for WD-40 is generally fragmented with the biggest pressure coming from smaller, local companies. They compete in maintenance product space, which has several product options to choose from. So, there are a lot of alternatives available for the consumers. Competition also comes from substitute products. However, WD-40 has a strong advantage of brand recognition, distribution channels, quality, and manufacturing, which have helped it to maintain a good position in the market.

What Makes WD-40 Different? While the products aren’t technically advanced, the brand’s ubiquity has allowed it to maintain its market presence. The brand is globally recognized and it enjoys strong customer loyalty and high repeat purchase rates, creating a unique position for the company. The company has also invested greatly in expanding the product line over the years, by making new products under the WD-40 family, to keep up with the times.

Financial Analysis:

  • Historical Income Statement: WDFC has demonstrated relatively stable revenue with slow but steady growth over the past decade, but this is mainly because of increased prices rather than organic revenue increase. The most recent financial year was at 4.6% growth. Profitability is good, with consistent operating income, although margins have been decreasing recently.
  • Balance Sheet: WDFC shows a healthy financial position, with a sizable amount of cash on hand. However, the debt to equity is quite high, which is something to keep a note of. More analysis is needed to see where the company is planning to deploy this cash or reduce the debt. Goodwill and intangibles make up a big portion of the balance sheet, which may mean lower book value and higher price to book ratio.
  • Cash Flow Statement: The company has a positive cash flow position and generates substantial free cash flow from its operations. This implies the company is generating sufficient cash to continue its operation. However, one third of the cash is utilized for share repurchases and dividends.

Moat Analysis: The company’s moat is quite narrow, rated as a 2 out of 5 because of the following:

  • Brand strength: The brand “WD-40” is a well-known name, but ultimately is still a can of liquid. The competition from other liquid, lubricant products is intense. The company sells a fairly simple product that other companies may easily be able to replicate, reducing its pricing power. There are also many alternatives and substitute products in the market, further eroding its moat.
  • Distribution: The company has a very large distribution network around the world, but this is not particularly hard to replicate for other big companies, making this an easier point of competition than a moat.
  • Customer Switching costs: Consumers have very low to zero switching cost, they can easily choose a similar product with similar pricing. So it’s a commodity market.

Legitimate Risks to the Moat and Business Resilience:

  • Competition: Increased competition may lead to erosion of the brand power and reduce market share. The availability of substitute products make it very easy for customers to switch to different providers.
  • Inflation: The recent surge in cost of raw material, packaging, shipping may further erode profitability. The company is increasingly reliant on price increase to drive revenue and that might make the product less appealing in the future.
  • Product Obsolescence: The company’s products may become obsolete if another innovation comes in the sector, making it less appealing.

Understandability Rating:

  • Rating: 1 / 5
  • Justification: The company’s business operations are simple to understand. It sells consumer goods like lubricants and cleaning products. Therefore it gets a 1 out of 5 in the understandability scale.

Balance Sheet Health Rating:

  • Rating: 4 / 5
  • Justification: WDFC’s balance sheet is quite good, it has an acceptable debt profile and more than enough cash to cover short term debt obligations. It has a low debt to equity ratio of around 0.8, a decent interest coverage ratio of 12.7. However, if debt is reduced and investment is made towards revenue generation, then the balance sheet would get stronger. But as of right now it has a good balance sheet rating.