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WD-40 (WDFC +4%) is trading higher after reporting EPS upside with its Q3 (May) report. Revenue rose 9.4% yr/yr to a record $155.1 mln, which also was better than expected. While most people know WDFC for its namesake WD-40 brand, it sells other Maintenance Products (GT85 and 3-IN-ONE) as well. WDFC also sells home cleaning products, but it's much smaller and WDFC has announced plans to sell its US and UK Homecare and Cleaning Products portfolio.

• WDFC remains encouraged that the improvement in trends it saw in the first half of fiscal year carried into Q3. Nearly all of its Q3 sales growth was driven by volume with currency and price impacts nearly cancelling each other out. Gross margin continues to improve and is moving closer to its long-term target of 55%. In Q3, gross margin improved substantially to 53.1% from 50.6% a year ago and from 52.4% in Q2.
• Its largest segment (49% of revs) is the Americas (US, Latin America, Canada), but it posted the slowest growth, up 6% yr/yr to $75.1 mln. Much of this growth came from strong sales of WD-40 Multi-Use Product in Latin America, which increased by 51% yr/yr. That was partially offset by lower sales of WD-40 Multi-Use Product in the US and Canada. Sales in Latin America were favorably impacted by a transition to a direct market model in Brazil.
• The company explained on the call that end user demand in the US remained relatively constant with sales down 2%. However, WDFC was lapping an extremely strong US performance in the year ago period when the US experienced exceptionally strong volume recovery. Also, part of the US softness came from strong declines in non-strategic household brands, which decreased by 15%.
• Sales in EIMEA (Europe, India, Middle East, Africa) were much stronger, up 13% yr/yr to $59.4 mln. Although without the FX tailwind, CC sales rose 10%. Growth was driven in large part by higher sales of WD-40 Multi-Use Product. AsiaPacific sales grew the most, up 14% yr/yr to $20.5 mln. In China, sales and maintenance products were up 29%, primarily due to successful brand building programs and the timing of customer orders.
• On two other key items, WDFC has been implementing a new ERP system, which is a significant investment. It went live in Q2 and is now in place over a substantial portion of its business, including the US, Latin America, and Asia regional distributor businesses. There were some minor disruptions in Q3 but most of the critical issues have subsided. WDFC also said it expects to sell its HCP portfolio during FY25. A sale will allow WDFC to focus on higher sales growth and gross margin segments.

Overall, investors were pleased with the Q2 results. We suspect sentiment was running low following a weak Q2 report in April. The trends that showed improvement in 1H carried into Q3. The gross margin metric jumps out at us as really impressive and helps explain the EPS upside. This stock has been trending lower for much of 2024, but this report was some much-needed good news.