WD-40 Company (NYSE: WDFC) issued a report that echoed news from RPM International (NYSE: RPM) and has it and other materials stocks moving lower. The news is revenue in calendar Q4 was weak and the near-term outlook is dimming due to the steadily increasing pressure of inflation and rising interest rates.

The takeaway, for The WD-40 Company at least, is that improvements in operational performance are driving margin gains and those, along with consumer demand, which is expected to improve in the back half of the year, should drive top and bottom line strength by year-end.

If so, this stock could very well bottom and begin moving up by the 2nd calendar quarter of the year, but there is a problem. The problem is that the broader economic outlook is still in decline so the guidance could be overly optimistic. 

“Though sales volumes were soft in some regions due to disruptions in the market linked to the pricing actions we recently executed, underlying volumes remain in line with our expectations. We shared with investors last quarter that we expected much of our topline growth in the fiscal year 2023 would be weighted toward the second half of the fiscal year.

We expect volume performance to improve in the second half of the fiscal year as price-related disruptions abate. Accordingly, today we are reiterating our guidance for the full fiscal year,” said CEO Steve Brass. 

WD-40 Company Falls On Mixed Results

WD-40 company had a decent quarter but some headwinds are impacting the business that has the headline revenue figure in bad shape. The top line came in at $124.9 million for a decline of 7.3% that missed the analyst's consensus by a good 1200 basis points. The caveat is that FX cut into the results by $9.5 million, worth 700 basis points of the miss.

The remainder of the miss and decline in revenue is due to a contraction in the EMEA segment that is largely attributable to the exit from Russia. The Americas grew by 3% and APAC by 25%, so there is the demand to support the business and pricing actions are helping as well. On a product line basis, the core Maintenance products segment declined by 8% while the harvest segment Household and Cleaning declined by only 2.0%. 

The company was able to post margin improvement on both a sequential and YOY basis, although the YOY gains are tepid. On a sequential basis, the gross margin improved by 400 basis points and more than expected to produce solid results on the bottom line. The GAAP $1.02 is down about 27% from last year but beat the consensus by a nickel which is good news for the dividend, if nothing else. 

And guidance, the company reiterated its full-year guidance, which is favorable relative to the Marketbeat.com analyst consensus estimates. It is calling for revenue in a range above the consensus and EPS in a range that brackets the consensus to the high side but is expecting 2nd-half performance to carry the load.

In this light, it seems as if management might be expecting a weak FQ2, and that shouldn’t be surprising. The risk is that FQ1/CQ1 weakness could linger into the following quarter and the next, and the next if the worst-case scenario for the economy unfolds. 

The Technical Outlook: WD-40 Is At Rock Bottom 

The price action in WDFC stock looks like it could be at rock bottom but there is a risk. Not only is the stock trading at a high multiple, about 31X earnings, but the outlook for the back half of the year could be in danger.

The stock could fall back to the $150 level and possibly lower in that scenario. This market needs a firm improvement in the outlook with no potentially weak periods to contend with. When that happens, WD-40 Company will begin to rebound.