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Sherwin-Williams Co. (SHW) reported net earnings of 63 cents per share in the first quarter of 2011, more than double of 30 cents per share in the year-ago period and up 11 cents from the Zacks Consensus Estimate of 52 cents. The first quarter earnings also whizzed past the company’s guided range of 48 cents to 58 cents per share.

Net sales for the quarter increased 19% year over year to $1.85 billion driven by acquisitions and selling price increases. Sherwin-Williams’ first quarter sales also exceeded the Zacks Revenue Estimate of $1.82 billion.

Cost of goods sold increased 21% to $1.06 billion in the quarter and expressed as a percentage of revenues, it increased 120 basis points to 57%. Gross profit surged 15% to $797.4 million while gross margin dipped 120 basis points year-over-year to 43%.

Selling, general and administrative expenses were $691.1 million, a 13% climb over $612.9 million in the prior-year quarter. Operating income upped 34% to $106.3 million and operating margin expanded 60 basis points year-over-year to 5.7% in the quarter.

Performance by Segment

The Paint Stores Group posted net sales of $929.3 million, up 9% from $850.9 million in the year-ago period. The improvement was largely attributed to selling price increases and expanding domestic architectural paint sales to residential repaint contractors and do-it-yourself customers and improving protective and marine product sales. Segment profit increased 44% year over year to $68.8 million driven by selling price increases, partially offset by raw material cost inflation.

Net sales of the Consumer Group inched up 1% from the same period last year to $294.9 million due to selling price increases and the timing of seasonal shipments to some customers partially offset by the elimination of a portion of a paint program with a large retail customer. Segment profit rose 10% to $41.1 million year over year mainly because of the cost saving initiatives undertaken by the company and selling price increases partially offset by increasing raw material costs.  

Net sales of the Global Finishes Group soared 50% to $630.2 million in the quarter as a result of acquisitions, higher paint sales volume, selling price increases and favorable currency translation rate changes.  The segment’s profit was $36.8 million, up 60% from $23 million recorded during the corresponding quarter of 2010. The progress was derived from increased paint sales volume and expense control.

Financial Position

Sherwin-Williams had cash of $53.9 million as of March 31, 2011 compared with $58.6 million as of December 31, 2010. During the quarter, the company acquired 1.1 million shares of its common stock through open market purchases. Sherwin-Williams had an authorization of 4.65 million shares remaining under the share repurchase program.

Outlook

Management expects net sales to increase in the range of 8% to 13% compared to second quarter 2010. The company expects EPS to lie in the range of $1.65 to $1.75 per share for the quarter.

For full year 2011, management expects net sales to increase above 2010 levels by a high single digit percentage. Alongside, the company reiterated its full year 2011 net earnings guidance range of $4.65 to $5.05 per share.

Our Take

Each of the business divisions of Sherwin-Williams has reaped benefits and will continue to do so, backed by the improving domestic and international markets, rising product prices, successful acquisitions along with the company’s cost reduction efforts. However, higher raw material prices remain a concern. We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.

Based in Cleveland, Ohio, Sherwin-Williams is a developer, manufacturer, distributor and seller of paints, coatings, industrial and marine products, original equipment manufacturer product finishes and related items, and automotive finishes and refinish products in North and South America, Europe, and Asia. The company’s key competitors include PPG Industries Inc. (PPG), The Valspar Corporation (VAL) and Air Products and Chemicals Inc. (APD).

 
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