Executive Summary / Key Takeaways

• WD-40 Company (NASDAQ:WDFC) is strategically pivoting towards a more focused, higher-margin maintenance product business, divesting non-core homecare and cleaning assets to concentrate on its iconic brands.
• The company is demonstrating strong execution on its "Four-by-Four strategic framework," driving double-digit volume growth in core maintenance products, particularly in EIMEA and through successful direct market transitions in Latin America like Brazil.
• Significant progress has been made on gross margin recovery, exceeding expectations and now projected to reach 55-56% in fiscal year 2025, driven by favorable mix, lower input costs, and operational efficiencies.
• Investments in strategic enablers, including a new ERP system, supply chain optimization, and digital commerce, are aimed at enhancing productivity and accelerating long-term growth, despite some temporary pressure on operating expenses.
• Fiscal year 2025 guidance projects core net sales growth of 6-11% (constant currency) and non-GAAP diluted EPS of $5.25-$5.55, reflecting confidence in continued volume growth, margin expansion, and operational leverage, while acknowledging potential headwinds from foreign currency and macroeconomic uncertainty.

Setting the Scene: An Iconic Brand's Strategic Evolution

For over seven decades, WD-40 Company (NASDAQ:WDFC) has built a legacy around developing and selling problem-solving products, most notably its ubiquitous blue-and-yellow can of WD-40 Multi-Use Product. What began as a rust-preventative solution for the aerospace industry has evolved into a global brand synonymous with maintenance and repair, solving problems in workshops, factories, and homes worldwide.

Today, WDFC is a global marketing organization with a clear strategic focus. Under its "Four-by-Four strategic framework," the company is concentrating its efforts on its core maintenance products, which include the flagship WD-40 Multi-Use Product, the expanding WD-40 Specialist line, and other maintenance brands like 3-IN-ONE and GT85. This strategic clarity is encapsulated in the company's mantra: "Few things, many places, bigger impact." This isn't just a product strategy; it's a guiding principle for operational efficiency, system streamlining, and global collaboration.

This focus has led to a significant strategic decision: the planned divestiture of certain homecare and cleaning product (HCCP) businesses in the Americas and the U.K. These assets, classified as held for sale as of February 28, 2025, represent a smaller, lower-margin portion of the portfolio. By shedding these non-core assets, WDFC aims to direct resources and investments towards its higher-growth, higher-margin maintenance products, positioning itself as a more focused and potentially more profitable entity. While this divestiture is not considered a discontinued operation due to its scale relative to the overall business, its successful completion in the coming months is a key near-term objective.

Within the broader consumer goods and household products industry, WDFC operates in a competitive landscape alongside much larger, diversified players like Procter & Gamble (PG) and specialized companies like Central Garden & Pet (CENTA) and Clorox (CLX). While Procter & Gamble (PG) dominates the household products space with vast scale and extensive distribution, WDFC carves out its niche through brand loyalty and specialized product performance, particularly in the DIY and industrial maintenance segments. Compared to Central Garden & Pet (CENTA) and Clorox (CLX), WDFC often demonstrates stronger profitability metrics like gross and operating margins, leveraging its proprietary formulations. However, its smaller scale relative to giants like Procter & Gamble (PG) can present challenges in market share capture and strategic adaptability.

A key differentiator for WDFC lies in its proprietary product formulations, particularly the iconic WD-40 Multi-Use Product. While the specific chemical composition is a trade secret, the technology provides tangible benefits like superior corrosion inhibition, penetration, lubrication, and moisture displacement. Competitive analysis suggests WDFC's products can offer quantifiable advantages, such as up to 20% better corrosion inhibition and 15% faster penetration compared to some alternatives, contributing to lower operating costs per unit for end-users due to longer-lasting effects. This performance edge, coupled with the brand's reputation built over decades, forms a significant competitive moat, allowing WDFC to command a premium price point (estimated 10-15% higher than some competitors) despite its smaller scale. The company's R&D efforts continue to focus on innovation and renovation, including sustainability initiatives and product improvements, leveraging a network of outside resources to enhance its core offerings and maintain its performance advantage.

Strategic Execution and Financial Performance

WDFC's strategic framework is driving tangible results, particularly in its core maintenance product categories and key geographic markets. The first half of fiscal year 2025 saw consolidated net sales increase by 7% to $299.6 million compared to the prior year period. This growth was primarily volume-driven, with sales volume favorably impacting net sales by approximately $22.2 million year-to-date, significantly outpacing the modest $1.3 million positive impact from average selling price increases. Changes in foreign currency exchange rates presented a headwind, unfavorably impacting net sales by an estimated $3.4 million year-to-date.

Performance across the segments reflects varied dynamics:

• Americas: Net sales increased 6% year-to-date to $135.0 million. This growth was significantly boosted by the strategic transition to a direct market model in Brazil, which favorably impacted net sales by approximately $3.1 million in Q1 FY25 and $3.4 million in Q2 FY25. Overall Latin America Multi-Use Product sales surged 33% year-to-date. This strong growth in Latin America offset lower sales in the U.S. (-7% Multi-Use Product year-to-date) and Mexico (-20% Multi-Use Product year-to-date) due to timing of customer orders, worsening economic conditions in Mexico, and unfavorable FX. WD-40 Specialist sales in the Americas grew a robust 12% year-to-date, primarily driven by new distribution in the U.S. HCCP sales declined 7% year-to-date as the company reduced promotional efforts for these brands ahead of the planned divestiture. Operating income for the segment decreased 6% year-to-date, as higher operating expenses (employee costs, credit losses, freight, Brazil sales commissions) outpaced the sales and gross margin gains.
• EIMEA: This segment delivered impressive growth, with net sales increasing 14% year-to-date to $117.1 million. On a constant currency basis, the growth was even stronger at 15% in Q2. WD-40 Multi-Use Product sales grew 16% year-to-date, driven by higher sales volume across nearly all regions, reflecting continued recovery and demand after price increases implemented prior to FY24. Direct markets like France, Italy, and Benelux saw significant increases. WD-40 Specialist sales also grew strongly, up 14% year-to-date, due to increased distribution and demand. HCCP sales declined 26% year-to-date, consistent with the strategic shift away from these brands in the U.K. Operating income for EIMEA surged 34% year-to-date, benefiting significantly from the strong sales growth and a substantial improvement in gross margin (up 380 basis points year-to-date to 58.0%).
• Asia-Pacific: Net sales decreased 3% year-to-date to $47.6 million. This was primarily due to a 4% decrease in WD-40 Multi-Use Product sales, driven by lower volume in Asia distributor markets (-$3.3M year-to-date) due to timing of customer orders (lapping strong Q4 FY24) and market disruption from the strengthening U.S. Dollar. Sales in China (+13% Multi-Use Product in Q1, +5% Specialist in Q2) and Australia (+6% HCCP year-to-date) showed growth, partially offsetting the declines. WD-40 Specialist sales increased 5% year-to-date. Operating income decreased 5% year-to-date, reflecting the lower sales volume and slightly higher operating expenses.

Consolidated gross profit margin has been a key area of success, increasing to 54.7% year-to-date from 53.1% in the prior year period. This 160 basis point improvement was driven by lower costs of aerosol cans (70 bps favorable year-to-date) and specialty chemicals (70 bps favorable year-to-date), along with favorable sales mix and other input costs (60 bps favorable year-to-date). While warehousing, distribution, and freight costs presented a headwind (60 bps unfavorable year-to-date), the overall trend is positive. Excluding the assets held for sale, the gross margin would have been 55.2% year-to-date, demonstrating the positive impact of the planned divestiture on this key metric.

Operating expenses have increased, reflecting strategic investments and higher employee costs. Selling, general, and administrative (SGA) expenses rose 12% year-to-date to $99.5 million, primarily due to higher employee-related costs ($5.7M increase year-to-date from incentive compensation, annual increases, headcount), increased professional services ($1.3M increase), higher freight ($0.9M increase), a credit loss adjustment ($0.8M increase), Brazil sales commissions ($0.5M increase), and increased travel ($0.5M increase). Amortization costs associated with cloud computing implementation (ERP) also increased SGA by $0.5 million year-to-date. Advertising and sales promotion (AP) expenses increased 15% year-to-date to $15.8 million, representing 5.3% of net sales, reflecting increased brand-building activities, particularly in the Americas and EIMEA. Total expenditure on AP activities (including costs recorded as a reduction to sales) was $32.3 million year-to-date, up from $29.1 million.

Despite the increase in operating expenses, income from operations grew 7% year-to-date to $48.4 million, driven by the strong top-line growth and gross margin expansion.

Net income for the six months ended February 28, 2025, was significantly impacted by a non-cash, one-time favorable income tax adjustment of $11.9 million in the second quarter, related to the release of an uncertain tax position from the 2017 Tax Cuts and Jobs Act. This resulted in reported net income of $48.8 million ($3.58 diluted EPS) year-to-date, compared to $33.0 million ($2.42 diluted EPS) in the prior year period. Excluding this one-time benefit, adjusted net income would have increased by $3.8 million, or 12%, to $36.9 million ($2.71 adjusted diluted EPS).

The company maintains a strong balance sheet and liquidity position. Cash and cash equivalents stood at $53.0 million as of February 28, 2025. Net cash provided by operating activities was $22.9 million year-to-date, lower than the prior year primarily due to increased inventory levels (to support supply chain initiatives and demand) and changes in accrued payroll liabilities. Net cash used in financing activities decreased significantly to $12.6 million year-to-date, largely due to net proceeds from the revolving credit facility compared to net repayments in the prior year, partially offset by increased dividends paid ($24.7M year-to-date) and treasury stock repurchases ($6.7M year-to-date). The company remains in compliance with its debt covenants and expects future cash flow from operations and the credit facility to fund its needs, including capital expenditures (targeted at 1-2% of sales), dividends (targeted at >50% of earnings), and share repurchases (authorized up to $50M through Aug 2025, with $35.2M remaining). Return on invested capital was 25.5% in FY24, meeting the company's target.

Outlook and Strategic Trajectory

WDFC's outlook for fiscal year 2025 reflects confidence in its core business strategy and continued operational improvements, presented on a pro forma basis excluding the expected divestiture of the HCC brands and the one-time tax benefit.

Management projects core net sales growth of between 6% and 11% (constant currency), resulting in net sales between $600 million and $630 million. This aligns with the company's long-term growth targets for maintenance products across its segments and is expected to be driven by continued volume growth from geographic expansion, premiumization, and Specialist product growth.

Gross margin is a highlight of the updated guidance, now expected to be between 55% and 56% for the full fiscal year, an increase from previous projections and positioning the company to exceed its 55% target a year ahead of schedule. This reflects the positive impact of cost savings initiatives, favorable mix, and the anticipated divestiture of lower-margin businesses.

Operating income is projected to be between $95 million and $100 million, representing growth of 6% to 12% over the pro forma 2024 results. While the gross margin outlook improved, the operating income guidance remained unchanged in Q2, primarily due to the offsetting impact of foreign currency exchange rate headwinds. Advertising and promotion investment is expected to remain around 6% of net sales, supporting brand-building efforts. The cost of doing business is expected to see improvements over time as sales grow and operational leverage increases, particularly after integrating the impacts of the divestiture.

The provision for income tax is now expected to be around 22.5% for the full year. This leads to an increased non-GAAP diluted earnings per share projection of between $5.25 and $5.55, representing growth of 11% to 17% over the pro forma 2024 results.

Beyond FY25, the company anticipates potential higher inflation and may implement modest price adjustments in certain markets to offset these costs. The long-term targets of a 55% gross margin, 30-35% cost of doing business, and 20-22% adjusted EBITDA margin remain aspirational beacons, with management focused on making progress towards them over time.

Strategic initiatives continue to underpin this outlook. Geographic expansion remains a key focus, with significant "land and expand" opportunities identified for both WD-40 Multi-Use Product ($1.2 billion remaining opportunity) and WD-40 Specialist ($530 million remaining opportunity) globally. Accelerating premiumization (targeting >10% CAGR for Smart Straw/EZ Reach) and driving Specialist growth (targeting >15% CAGR) are central to the profitable growth strategy. Digital commerce is viewed as a critical accelerator, enhancing brand awareness and driving sales across channels. Operational excellence is being pursued through supply chain optimization, strengthening supplier partnerships, and leveraging enhanced systems like the new ERP (with Wave 2 planned) and Salesforce to drive productivity and efficiency. The focus on sustainability, with specific GHG emission reduction targets, is also integrated into the long-term strategy.

Risks and Challenges

Despite the positive momentum and clear strategic direction, WDFC faces several risks that could impact its performance and outlook. Global economic conditions, including inflation, potential recessions, and volatility in financial markets, could affect consumer demand, input costs, and foreign currency exchange rates. Changes in international trade policies and tariffs, while partially mitigated by a diversified supply chain, could still impact costs in certain markets.

The successful execution and timing of the planned divestiture of the HCC businesses are subject to uncertainty, and any delays or failure to complete the transaction could affect the company's strategic focus and financial metrics. Integrating the acquired Brazilian business and rolling out the next phases of the ERP system present operational challenges that require careful management to avoid disruption.

Competition remains intense across all segments, with larger players like Procter & Gamble (PG) possessing significant scale and resources. WDFC must continue to innovate and execute effectively to maintain its brand loyalty and performance differentiation against rivals who may compete on price or speed of innovation. Fluctuations in raw material costs, particularly for specialty chemicals and aerosol cans, could pressure gross margins if not offset by pricing or efficiency gains.

While the company's liquidity is strong, its debt levels and compliance with covenants require ongoing monitoring, particularly in a changing interest rate environment. The ability to generate sufficient cash flow from operations is crucial for funding strategic investments, dividends, and share repurchases.

Conclusion

WD-40 Company (NASDAQ:WDFC) is embarking on a focused strategic journey, leveraging its iconic brand and differentiated maintenance products to drive profitable growth. The planned divestiture of non-core assets, coupled with targeted investments in geographic expansion, premiumization, the Specialist line, and operational efficiency through enhanced systems and supply chain optimization, positions the company for a potentially higher-growth, higher-margin future.

Recent financial performance, marked by strong volume growth, significant gross margin recovery ahead of schedule, and solid operating income growth (excluding one-time items), provides tangible evidence that this strategy is gaining traction. The updated fiscal year 2025 guidance reinforces confidence in continued top-line expansion and margin improvement. While macroeconomic uncertainty, foreign currency fluctuations, and competitive pressures remain factors to navigate, WDFC's clear strategic framework, operational focus, and commitment to leveraging its core strengths suggest a compelling narrative for investors focused on a resilient business executing a deliberate pivot towards enhanced profitability and global reach. The successful execution of the divestiture and continued progress on strategic initiatives will be key factors to monitor in the coming quarters.