It's hard for U.S. investors to appreciate fully the current economic conditions across the globe. Even while the domestic economy keeps motoring forward, the global economy has sputtered in troubling ways, and that's put a strain on multinational businesses that rely on international business activity to thrive. Sherwin-Williams (NYSE: SHW) gets much of its revenue from sales of paint and coatings in overseas markets, and increasingly, it's seen a gulf between how it's doing close to home and its performance in key foreign markets.
Coming into Tuesday's first-quarter financial report, Sherwin-Williams investors had hoped to see modest gains that would reflect the struggles that the paint specialist has faced around the world. Unfortunately, Sherwin-Williams fell short of those hopes, and although it remains confident about its prospects for the full year, investors don't seem to be as comfortable about what the future could bring.
Image source: Sherwin-Williams.
A weakening world paint market
Sherwin-Williams' first-quarter results once again disappointed industry watchers. Revenue was higher by just 1.9% to $4.04 billion, which was barely half the growth rate that most of those following the stock had looked to see. Net income was down 2% from year-ago levels to $245.2 million, and even after accounting for extraordinary items, adjusted earnings of $3.60 per share were less than the consensus forecast among investors for $3.69 per share.
As we've seen in recent quarters, Sherwin-Williams saw much different performance across its segments. In the Americas Group, segment sales were higher by 3.6%, with the company citing higher paint sales volume across most North American stores and increases in selling prices as contributing to better results. Same-store sales in the U.S. and Canada climbed 3.6%, although the company did face some currency-related pressure that held back what would otherwise have been even better sales growth. However, foreign exchange took a toll on segment profit, which dropped 2% as higher raw materials costs also weighed on the expense side of the income statement.
In Sherwin-Williams' consumer brands unit, investors saw sales drop but profits rise. Net segment revenue fell 0.3% due in part to what the paint giant called "soft non-domestic market conditions," as well as a key divestiture and currency headwinds. However, segment profit jumped 18% from year-ago levels, reflecting higher selling prices and lower overhead. Similarly, sales in the performance coatings group were up just 0.2%, but segment profit climbed 9% despite higher raw material costs.
CEO John Morikis explained some of the challenges that Sherwin-Williams faces. "We made good progress on our pricing initiatives across all segments during the quarter and effectively managed SG&A spending," Morikis said, "but volumes fell short of expectations due to a slower start to the architectural painting season in North America and continued challenging conditions in many end markets outside North America." The CEO did note that higher gross margin and continued cost controls have helped prevent any greater deterioration in Sherwin-Williams' financial condition.
Can Sherwin-Williams bounce back?
Sherwin-Williams remains optimistic about its future. With 15 net new stores opened during the first quarter in the Americas Group segment, the paint giant believes that it's positioned well to take advantage of the key spring selling season. Sherwin-Williams also anticipates that overall sales volume growth should accelerate into the second half of 2019.
However, investors weren't certain about Sherwin-Williams' near-term prospects. The company said that it expects net sales to climb 2% to 5% year over year in the second quarter of 2019, setting the stage for Sherwin-Williams to have to come in at the top of that range in order to meet the current consensus forecast among those following the stock. Despite a change to GAAP earnings guidance, Sherwin-Williams still believes that it will see adjusted earnings of $20.40 to $21.40 per share for the full year, unchanged from what it expected three months ago.
The results and the unchanged full-year guidance left Sherwin-Williams shareholders feeling disappointed, and the stock dropped 3% in pre-market trading following the announcement. In the absence of signs of recovery in the global economy outside North America, it'll be tough for Sherwin-Williams to reassure impatient investors that it'll be able to capitalize on long-term growth prospects once economic conditions worldwide return to more normal levels.
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