Sherwin-Williams (SHW) Misses Q2 Earnings, Sales Estimates

The Sherwin-Williams Company’s (NYSE:SHW) earnings, excluding costs related to the proposed acquisition of Valspar (NYSE:VAL) and gains from reduction in income tax provision, were $4.06 per share in second-quarter 2016. Adjusted earnings missed the Zacks Consensus Estimate of $4.17. Reported earnings climbed to $3.99 per share from $3.70 a year ago.

Improved operating results of the Paint Stores and Global Finishes Groups led to the increase in earnings. However, currency translation rate changes decreased earnings by 2 cents per share in the quarter.

Sherwin-Williams, whose well-known brands include Dutch Boy, Minwax and Krylon, recorded net sales of $3,219.5 million in the second quarter, marking a 2.8% year-over-year rise. Revenues, however, missed the Zacks Consensus Estimate of $3,276 million.

Increased paint sales volumes in Sherwin-Williams’ Paint Stores Group led to higher sales in the quarter, partly offset by unfavorable currency translation. Currency swings had an unfavorable effect of 1.5% on consolidated net sales.

Segment Review

The Paint Stores Group unit registered net sales of $2.11 billion in the reported quarter, up 6.2% year over year. The improvement was driven by increased architectural paint sales volume across all end markets. Net store sales from stores, open for more than 12 calendar months, rose 5.2% from the prior-year quarter.

Net sales of the Consumer Group unit fell 2.6% to $477.5 million, mainly due to the initial shipments of HGTV HOME products by Sherwin-Williams to Lowe's stores a year ago. The segment’s profits reduced due to lower sales and increased SG&A spending, partly neutralized by improved operating efficiencies.

Net sales from the Global Finishes Group segment were down 1.3% to $499.2 million in the quarter, mainly due to unfavorable currency impact that hurt sales by 2.6%. Segment profits enhanced year over year, owing to a fall in costs of raw materials and good cost-control, which were partly offset by unfavorable currency translations.

Latin America Coatings Group’s net sales declined 11.2% to $133.3 million, mainly due to unfavorable currency translation and less volume, partly mitigated by a higher selling price. Unfavorable currency translation affected sales by 16.4% in the quarter. Segment profit decreased owing to increasing raw material costs and an unfavorable currency translation rate.

Financials and Shareholder Returns

Sherwin-Williams made no open market purchases of its common stock in the six-month period ending Jun 30, 2016. As of Jun 30, 2016, the company had $402.7 million cash in hand that will be used to finance the Valspar acquisition.

Outlook

Sherwin-Williams, which is among the leading paint companies, along with PPG Industries Inc. (NYSE:PPG) and Akzo Nobel NV (OTC:AKZOY) , expects consolidated net sales to increase a low to mid-single digit percentage in third-quarter 2016, compared with last year's third quarter. The company anticipates earnings per share in third-quarter 2016 to be in the range of $4.10–$4.30 per share. Third-quarter earnings per share include costs related to the planned acquisition of Valspar of around 20 cents per share and an increase in earnings per share of about 10 cents related to the decrease in the income tax provision.

For 2016, the company expects consolidated net sales to increase by a low-single digit percentage compared with 2015. It raised its earnings per share guidance for 2016 to the range of $11.65–$11.85 per share, compared to $11.16 earned in 2015. The full-year guidance include costs related to the expected buyout of Valspar totaling about $1.30 per share and an increase in earnings of about 45 cents per share related to the reduction in the income tax provision.

Sherwin-Williams currently carries a Zacks Rank #3 (Hold).