WD-40's Earnings Call Contradictions: Gross Margins, Asia-Pacific Growth, and CapEx Outlook in Question

Date of Call: January 8, 2026

Financials Results

• Revenue: $154.4 million, up 1% YOY
• EPS: $1.28 per diluted share, down 8% YOY
• Gross Margin: 56.2%, up 140 basis points YOY and up 150 basis points sequentially

Guidance:

• Net sales expected between $630 million and $655 million, up 5% to 9% YOY (pro forma).
• Gross margin expected between 55.5% and 56.5%.
• Operating income expected between $103 million and $110 million, up 5% to 12% YOY (pro forma).
• Diluted EPS expected between $5.75 and $6.15, up 5% to 12% YOY (pro forma).
• A&P spend projected at ~6% of net sales.
• Tax rate expected between 22.5% and 23.5%.
• Guidance assumes no major economic changes; unanticipated inflation could impact results.

Business Commentary:

Key Theme: Sales Performance and Regional Trends: - The company reported consolidated net sales of $154.4 million, a 1% increase compared to last year. Sales in direct markets grew 8%, in line with long-term targets, while marketing distributor sales were softer due to timing-related inventory adjustments, not end-user demand weakness. - Americas sales grew 4% with strong U.S. and Latin America performance. OMEA sales grew 5% excluding divested businesses, driven by WD-40 Specialist growth, but offset by distributor market softness. Asia Pacific sales declined 10%, primarily due to distributor market inventory normalization, though China grew 8% and a rebound is expected in the back-half. - Second quarter is off to an excellent start with solid growth across all trade blocs, supporting confidence in full-year guidance.

Key Theme: Gross Margin Strength and Cost Initiatives: - Gross margin was 56.2%, up 150 basis points sequentially and 140 basis points year-on-year, driven by lower specialty chemical costs, lower CAM costs, and higher average selling prices/premiumization. - The company is actively reducing supply chain costs through global sourcing initiatives (e.g., for cans and specialty chemicals) and optimizing the distribution network to reduce freight costs. These efforts are expected to provide further margin accretion in FY26 and FY27.

Key Theme: Strategic Progress and Financial Guidance: - The company reaffirmed its FY26 guidance ranges and expressed confidence in achieving the mid-to-high end due to scheduled promotional activities and recovery in distributor markets. - Key strategic progress includes: strong e-commerce growth (up 22%), employee engagement at a record 95%, and dividend increase reflecting confidence in cash flow. - Cost of doing business was 40% of sales, temporarily above the 30%-35% target due to investments and lower sales; expected to improve as revenue grows.

Key Theme: Strategic Framework Execution and Growth Opportunities: - Must-Win Battles are on track: geographic expansion, premiumization (49% of multi-use product sales are premiumized), and WD-40 Specialist growth (up 18% in Q1 with significant market potential). - The attainable market for WD-40 Multi-Use Product is ~$1.9 billion, with a $1.4 billion opportunity to capture only 25% of potential currently. - The company is focused on operational excellence, with global on-time performance at 97.6% and continued progress on responsible sourcing.

Key Theme: Capital Allocation and Dividend Policy: - The company maintains a strong financial position and prioritizes annual dividends targeting >50% of earnings. - The quarterly dividend was increased 8% to $1.02 per share. - Share repurchases accelerated, with ~$7.8 million spent in Q1, and plans to fully utilize the remaining ~$22 million authorization by fiscal year-end, reflecting strong conviction in long-term fundamentals.

Sentiment Analysis:

Overall Tone: Positive

• Confidence in long-term growth trajectory despite Q1 softness, with 'strong rebound' expected later in fiscal year. 'Second quarter is already off to an excellent start with solid growth.' Reaffirmed guidance and 'highly confident in delivering results at the mid to high end of our guidance ranges.'

Q&A:

• Question from Mike Baker (D.A. Davidson): Can you give more detail on the indicators pointing to strong results and whether the mid-to-high end guidance is more bullish than original?
  Response: Confidence stems from locked-in promotional activities and scheduled second-half initiatives, with a strong expected Q2 and recovery in Asia distributor markets.

• Question from Mike Baker (D.A. Davidson): Are we seeing a recovery in Asia distributor markets already?
  Response: Recovery has begun in Q2, with a stronger Q2 and a powerful second half driven by U.S., European direct markets, and the rebound in Asian distributor markets.

• Question from Mike Baker (D.A. Davidson): Why are buybacks accelerating to utilize the full $30 million authorization?
  Response: Management accelerated buybacks due to strong conviction in long-term fundamentals, more than doubling the prior year's buyback amount.

• Question from Daniel Rizzo (Jefferies): What specific supply chain cost-reduction steps are being taken?
  Response: Actions include global sourcing initiatives (e.g., can cost reductions), optimizing distribution networks, and reducing transportation miles, with some impacts in FY26 and more in FY27.

• Question from Daniel Rizzo (Jefferies): Will these moves lead to gross margins sustainably above 55%?
  Response: Management is confident in current strong margins and sees opportunities for further cost reduction in FY26 and FY27, though long-term sustainability depends on market factors.

Contradiction Point 1

Gross Margin Sustainability Outlook

This is a direct contradiction in the **confidence and timeline** regarding the sustainability of a key long-term financial target (55%+ gross margin). Moving from a conditional, input-cost-dependent outlook to a more assertive stance with immediate "margin accretion" opportunities significantly alters the perceived quality and durability of the company's profitability.

Does the increase in distribution centers indicate increased CapEx spending? Is the current performance level sustainable long-term? - Daniel Rizzo (Jefferies)

2026Q1: We are sitting above 55% right now... we believe that there’s opportunities for us to get margin accretion even this fiscal year, and some of those initiatives that we have in the pipeline are going to benefit us in next fiscal year. - Steve Brass(CEO)

With gross margin at 55–56% (exceeding the 55% long-term target), does this indicate possible margin contraction next year or slower growth? How should we assess gross margin trends moving forward? - Daniel Rizzo (Jefferies LLC, Research Division)

2025Q3: Several supply chain initiatives are in the pipeline, which could be accretive if inflationary headwinds do not arise. If input costs remain stable, these initiatives will further improve margins beyond 55%. - Sara K. Hyzer(CFO)

Contradiction Point 2

Asia-Pacific Distributor Market Growth Runway

This involves a significant shift in the characterization of a **key market's growth potential**. Moving from a declaration of a "very, very long" growth runway with specific examples to a more immediate, cyclical description of a "recovery" and "stronger result" later in the year changes the narrative from long-term expansion to near-term stabilization, impacting regional growth forecasts.

What specific indicators support the strong results? Is the mid to high end of the full-year guidance range more bullish than the original guidance? - Mike Baker (D.A. Davidson)

2026Q1: We’re already seeing [a recovery in Asia distributor markets] at the beginning of Q1... Q2, you’re going to see a stronger result, but then the real power comes in the back half of the year. - Steve Brass(CEO)

What is the remaining growth potential for the distributor market in the Asia Pacific region? - Keegan Cox (DA Davidson), on for Mike Baker

2025Q4: The growth runway in Asia Pacific distributor markets is very, very long. Markets like Indonesia are growing at a ~20% CAGR... - Steve Brass(CEO)

Contradiction Point 3

Capital Expenditure Outlook

This contradiction pertains to the **definition and forecasting** of a critical capital allocation metric. The 2024Q1 statement introduces a specific, material future capital charge (ERP amortization) that is not reflected in the 2026Q1 characterization of CapEx as low and stable. This represents a change in how financial commitments are communicated.

With the increase in distribution centers, does this indicate an increase in CapEx spending? - Daniel Rizzo (Jefferies)

2026Q1: our guidance of 1% to 2% from a maintenance CapEx standpoint is still going to be a very good target that we’ll be landing within. - Steve Brass(CEO)

When will ERP implementation costs impact the income statement? - Linda Bolton-Weiser (D.A. Davidson)

2024Q1: The new ERP system is on track to go live in Q2. Amortization of the approximately $10 million in capitalized costs will begin in Q2, with more transparency provided in subsequent quarters. - Sara Hyzer(CFO)

Contradiction Point 4

Gross Margin Drivers and Expectations

This point highlights an inconsistency in the **explanation of margin drivers**. In 2024Q1, the CFO explicitly downplays volume as a "silver bullet" for margin improvement due to rising fill fees. In 2026Q1, the CEO implies that current margins are sustainable/achievable without explicitly reconciling this contradiction, potentially leaving investors confused about what truly drives profitability.

Are there planned CapEx expenditures to enhance regional footprints with the increase in distribution centers? Is the 55% gross margin guidance realistic, given current performance appears higher and potentially sustainable? - Daniel Rizzo (Jefferies)

2026Q1: We are sitting above 55% right now... we believe you can see in the guidance this year, we believe that there’s opportunities for us to get margin accretion even this fiscal year... - Steve Brass(CEO)

Under the asset-light model, does higher production volume improve gross and EBIT margins significantly? - Daniel Rizzo (Jefferies)

2024Q1: Volume does help by allowing better pricing from the filler network. However, fill fees have been higher than a year ago due to sticky labor and inflationary costs at third-party manufacturers. So while volume is positive, it is not a silver bullet for margin improvement. - Sara Hyzer(CFO)

Contradiction Point 5

Nature and Purpose of Marketing/Investment Spend

This represents a shift in the **strategic narrative around marketing investment**. The 2025Q3 explanation clearly distinguishes between "brand building" (a long-term growth driver) and "promotional activity" (short-term, timing-sensitive). The 2026Q1 statement blurs this distinction, framing promotional activity as a regular part of the "stronger result" in Q2, which could imply a different capital allocation priority or margin pressure point.

Can you detail the indicators behind the strong results? Is the updated guidance (mid to high end of the full-year range) more bullish than the original guidance? - Mike Baker (D.A. Davidson)

2026Q1: We are already seeing that at the beginning of Q1, and that’s our expectation... So yeah, we had a relatively soft-ish Q1 overall. Q2, you’re going to see a stronger result, but then the real power comes in the back half of the year. - Steve Brass(CEO)

Promotional activity is driving business, yet promotional spending as a percent of sales is down year-to-date. How do we reconcile this? - Michael Allen Baker (D.A. Davidson & Co., Research Division)

2025Q3: The distinction is between **promotions** and **brand building**. Marketing investments are focused on **brand building and sampling programs**... Promotional activity with major box retailers, such as in the U.S., can be substantial and timing-sensitive. - Steven A. Brass(CEO)