WD-40 Company (NASDAQ:WDFC) saw its shares surge 14.8% to $274.80 in Friday morning trading, following a stronger-than-expected fiscal third-quarter earnings report. The lubricant maker reported revenue of $195.1 million, well above the $172.8 million consensus estimate, and adjusted earnings of $2.33 per share, beating the $1.56 forecast. The stock hit an intraday high of $298.44, up 24.7%, before giving back about 40% of those gains.
However, the company's outlook for the fiscal fourth quarter points to a sharp slowdown in both sales and margins, tempering the initial enthusiasm. At the midpoint of the full-year guidance, implied fourth-quarter sales would be approximately $171.3 million, roughly 12% lower than the third quarter. Gross margin is expected to decline to around 51.5%, down from 56.6% in Q3, while adjusted operating margin is projected to nearly halve to 11.0% from 21.3%.
Q3 Strength Driven by Operating Leverage
Chief Executive Steve Brass attributed the strong Q3 performance to the operating leverage inherent in the company's business model. While sales rose 24%, operating income jumped 47% to $40.3 million, as certain costs, such as administration, were spread over higher revenue. The company also benefited from a shift in business scope, as it stopped pushing its Americas homecare and cleaning products (HCCP) and added their projected results back into its guidance.
Excluding the HCCP contribution, the midpoint of the full-year guidance shows a more modest increase of about $5 million in sales, $600,000 in operating income, and roughly $0.08 in earnings per share. The retained portfolio accounts for 71% of the sales increase and 68% of the earnings per share increase in the guidance.
Q4 Headwinds: Timing and Cost Pressures
Chief Financial Officer Sara Hyzer noted that the downside in Q4 is primarily a timing issue, with about $3 million of business shifted into Q3 as customers moved up purchases to avoid price hikes or stock up due to supply concerns. Brass added that the latest price increases do not fully represent the scale of cost increases the company has experienced. Most of the benefits from higher prices and cost savings are now expected to materialize in fiscal 2027.
Valuation and Analyst Perspective
Despite the strong Q3 report, WD-40's valuation remains elevated, trading at approximately 41.7 times trailing earnings. This is well above peers such as RPM International (NYSE:RPM) at 20.3 times and Church & Dwight (NYSE:CHD) at 31.8 times. D.A. Davidson maintained its Buy rating and raised its price target to $305 from $270, implying about 11% upside from late morning trading levels. However, the day's high already came within 2.2% of the new target, suggesting limited near-term upside.
The key challenge for WD-40 will be whether it can stabilize margins in the coming quarters, as the Q4 guidance signals significant headwinds. Investors will be watching closely for any signs of margin recovery or further deterioration.
