Dorman Products Misses Estimates on Weak Sales Growth

By Investing Basics Fool.com

Auto-parts maker Dorman Products reported earnings before the bell on Wednesday, July 29. Here's what you need to know.

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The quick summary
For the quarter ended June 27, Dorman earned $0.65 a share on revenue of $198.7 million. Earnings, revenue, and gross profit margin were all up a bit from the year-ago quarter.

Dorman's earnings and revenue numbers both missed Wall Street's expectations. Analysts polled by Thomson/First Call had expected earnings of $0.69 on revenue of $206.64 million.

Dorman's shares were down almost 3% in early morning trading after the news was released.

The headwinds haven't changed since last quarter's big miss
Dorman manufactures and supplies a huge line of replacement automotive parts parts to auto dealers and retail markets, including the big auto-parts retail chains. Sales grew just 1% versus the second quarter of 2014, but CEO Steven Berman argued that "difficult comps" were obscuring what had been a decent quarter.

Berman noted in a statement that sales had increased 21% in the year-ago quarter, a significant leap for the business.

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But more to the point, he also acknowledged that an ongoing inventory reduction program by a significant customer and "softer market conditions" had hurt Dorman's sales growth.

This isn't the first time we've heard these explanations -- and it isn't the first time Dorman has missed. Both earnings and revenue fell well short of Wall Street expectations last quarter, for similar reasons.

But the good news is that things could be looking up as we move into the second half of 2015.

Some signs of progress
There were signs of progress in Dorman's second-quarter report. Selling, general, and administrative expenses were up 9% year over year because of $1.9 million in costs associated with the company's ongoing implementation of an enterprise resource planning (ERP) system -- but the ongoing ERP-related drag on earnings may be nearing an end..

The ERP conversion is a complicated project that has weighed on Dorman's results for several quarters. The $1.9 million in added costs in the second quarter was an improvement over the $2.8 million that Dorman attributed to the project in the first quarter. The company said on Wednesday that its distribution costs are "expected to return to historical levels" by the end of the third quarter.

Berman said that the "distraction" of the ERP implementation actually slowed the company's ability to introduce new products. Sales from products introduced in the last 24 months represented 20% of sales, he said, versus 22% in fiscal 2014, a drop he blamed on part on a slower new-product introduction rate over the last three quarters.

But things may be looking up on that front as well. After a slow start in the first quarter, Berman said that the company is now on pace to exceed last year's total new-parts introductions by about 10%.

The upshot: Dorman expects a better-looking second half
The story in the second quarter wasn't quite as bad as Dorman's huge first-quarter miss, but the themes were very similar. But Berman argued that the first half of 2014 made for difficult year-over-year comparisons.

Certainly the first-half comps don't look good: Sales up just 2%, earnings per share down 2%. But first-half operating cash flow jumped almost 82% to $34.9 million, and growth rates in the second half of 2015 should look a lot better as the comps ease and Dorman's new products start to generate added incremental sales.

The article Dorman Products Misses Estimates on Weak Sales Growth originally appeared on Fool.com.

John Rosevear has no position in any stocks mentioned. The Motley Fool recommends Dorman Products. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.