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Tickers in this Article: WDFC, UN, UL, CLX, PBH
WD-40 Company (Nasdaq:WDFC) boasts of selling consumer products in more than 160 countries worldwide. Unfortunately, overseas sales are a key reason its top and bottom line fell to the double digits during its second quarter. Management also tempered its full-year outlook, but WD-40's business model could still grease the wheels of investor portfolios.

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Quarterly Results

In the second quarter, ending February 28, sales fell 21.7% to $61.8 million, with currency fluctuations accounting for $8.5 million of the shortfall, according to management. Sales of the flagship namesake lubricant and the 3-IN-ONE brand fell 20.6% to account for 76.2% of total sales. The rest of sales stemmed from a modest portfolio of household cleaning brands, which fell 24.9%.

In terms of geography, sales in the Americas fell 11.1% and a more severe 34.3% in Europe and 30.9% in the Asia-Pacific region. Again, a strong dollar adversely affected global revenues, with sales in every key location hit by lower consumer spending thanks to "overall weakness in the global economy," according to president and CEO Garry O. Ridge. (Examine various ways in which companies use derivatives to manage risk, read Corporate Use Of Derivatives For Hedging.)

The bottom line was torpedoed by a hefty $2.8 million "brand valuation charge" as the company determined its Carpet Fresh brand was not as valuable as reflected on the goodwill portion of its balance sheet. Net income including this charge came in at $4.1 million, which was down 52.9% from last year's second quarter. On a per-share basis, earnings were twenty-five cents, which just covered the twenty-five cent dividend payment.

Short-Term Outlook
WD-40 expects full-year sales to come within a range of $279-292 million. Net income should fall within a range of $22.5-25.8 million, or $1.35-1.55 per share, and includes a thirty cent hit from currency fluctuations. This outlook is quite a bit below what analysts were expecting before the quarterly results were announced.

The Bottom Line
Despite the near-term turbulence, WD-40 remains an appealing company. Management summed it up well in the earnings press release, stating that WD-40 is a resilient company with a strong balance sheet, good cash flows, limited debt and minimal capital requirements. Indeed, cash on hand exceeds reported long-term debt and capex is a small fraction of operating cash flow generated by the firm's stable of brands.

And in the company's defense, other consumer brand rivals, such as Clorox (NYSE:CLX) and Prestige Brands (NYSE:PBH) are seeing similar currency challenges and lower sales as embattled consumers cut back on spending and turn to more affordable private label brands. Even European-based Unilever (NYSE:UN) Unilever pcl (ADR) (NYSE:UL) recently bemoaned of adverse currency effects, but the fact remains that these companies generally sell products that consumers need, which implies their underlying businesses remain sound, despite near-term struggles.

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