Valvoline Inc. (NYSE:VVV) is the quick, easy, and trusted leader in automotive preventive maintenance, creating shareholder value by driving the full potential of its core business, accelerating network growth, and innovating to meet the evolving needs of customers and the car parc. With a focus on providing 15-minute stay-in-your-car oil changes, battery and wiper replacements, tire rotations, and other manufacturer-recommended services, Valvoline operates and franchises more than 1,900 service center locations through its Valvoline Instant Oil Change and Great Canadian Oil Change retail brands, while also supporting nearly 300 Express Care locations.

Financials

In the second quarter of fiscal 2024, Valvoline delivered strong financial results, with net revenues increasing 12.8% year-over-year to $388.7 million. This growth was driven by a 7.7% increase in system-wide same-store sales, with the majority of the contribution coming from higher average ticket prices due to increased non-oil change service penetration, premiumization, and pricing actions. The company also added 38 net new stores to its system during the quarter, bringing the total to 1,928 stores, an 8% increase over the prior year.

Gross profit for the quarter increased 15.4% to $146.2 million, with the gross margin expanding 80 basis points to 37.6%. This improvement was primarily attributable to labor efficiency gains, which more than offset higher depreciation and other store operating expenses. Selling, general, and administrative (SG&A) expenses increased $9.7 million, or 15.5%, due to investments in technology, advertising, and talent to support the company's growth initiatives.

Adjusted EBITDA for the quarter grew 21% to $105.1 million, with the adjusted EBITDA margin expanding 170 basis points to 27.0%. This strong profitability, combined with lower net interest expense and a reduction in the average share count, drove a 61% increase in adjusted earnings per share to $0.37.

For the first six months of fiscal 2024, Valvoline reported net revenues of $762.1 million, a 12.5% increase over the prior year period. Gross profit improved 14.5% to $281.0 million, with the gross margin expanding 70 basis points to 36.9%. Adjusted EBITDA for the first half of the year increased 21.8% to $195.3 million, with the adjusted EBITDA margin improving 190 basis points to 25.6%.

Liquidity

The company's balance sheet and liquidity position remain strong, with $494.5 million in cash and cash equivalents as of March 31, 2024. During the second quarter, Valvoline returned $40.4 million to shareholders through share repurchases, completing the $1.6 billion authorization announced in November 2022. Subsequent to the quarter, the company executed a tender offer to repurchase its outstanding $600 million 2030 senior notes, further optimizing its capital structure.

For the full fiscal year 2024, Valvoline has narrowed its guidance, expecting same-store sales growth of 6% to 8%, net revenues of $1.6 billion to $1.65 billion, adjusted EBITDA of $430 million to $455 million, and adjusted earnings per share of $1.45 to $1.65.

Driving the Full Potential of the Core Business

Valvoline's strategic focus on driving the full potential of its core business is evident in its strong same-store sales performance. The 7.7% system-wide same-store sales growth in the second quarter was primarily driven by increased non-oil change service penetration, which contributed over 70% of the ticket growth. The company's focus on employee retention, best practice sharing, and training has enabled its teams to effectively educate customers on the additional services their vehicles require, leading to higher average ticket prices.

The company's transaction growth, which contributed approximately 30% to the same-store sales increase, was also supported by improved labor management, particularly during the weather-related challenges experienced in January. Valvoline's proactive approach to scheduling and staffing allowed it to trim schedules during the slower periods and then quickly add labor to meet the returning customer demand, resulting in significant labor efficiency gains that exceeded expectations.

Accelerating Network Growth

Valvoline continues to make progress on its strategic priority of accelerating network growth, adding 38 net new stores during the second quarter, including 14 from franchise partners. This brings the total system-wide store count to 1,928, an 8% increase over the prior year. The company remains on track to achieve its full-year guidance of 140 to 170 total net new store additions, with 55 to 70 coming from franchise.

The company's focus on a balanced approach to new store openings, with a mix of ground-up builds and acquisitions, has allowed it to maintain a steady pace of expansion. Valvoline has also been proactive in addressing potential supply chain and construction challenges, such as holding signage inventory in a central warehouse to ensure timely openings.

Innovating to Meet Evolving Customer Needs

Valvoline's research and development team is continuously exploring opportunities to expand its service offerings to better meet the needs of its customers and the evolving car parc. While the company has not yet announced any specific new services, it maintains a disciplined approach, ensuring that any potential additions align with its "quick, easy, trusted" philosophy and can be effectively scaled across its network.

One area of focus has been the company's battery offering, which has presented some operational challenges due to the diversity of battery types and the need for rigorous testing. Valvoline is working to address these challenges, leveraging its data analytics capabilities and exploring improvements to its battery testing devices, as it believes there is significant opportunity to grow this service.

Financial Performance and Liquidity

For the full fiscal year 2023, Valvoline reported net revenues of $1,443.5 million, a 12.5% increase over the prior year. Net income for the year was $1,419.7 million, which included a significant gain from the sale of the company's former Global Products segment. Operating cash flow for fiscal 2023 was -$40.8 million, while free cash flow was -$221.3 million.

In the second quarter of fiscal 2024, Valvoline's net revenues grew 12.8% year-over-year to $388.7 million, driven by the 7.7% increase in system-wide same-store sales. Gross profit for the quarter increased 15.4% to $146.2 million, with the gross margin expanding 80 basis points to 37.6%. Adjusted EBITDA grew 21% to $105.1 million, with the adjusted EBITDA margin improving 170 basis points to 27.0%.

Risks and Challenges

While Valvoline has demonstrated strong operational and financial performance, the company faces several risks and challenges that investors should consider. The successful implementation of the company's new enterprise resource planning (ERP) system has been complicated by material weaknesses in internal controls related to IT general controls, which the company is actively working to remediate. Any prolonged issues with the ERP system could disrupt business operations and financial reporting.

Additionally, Valvoline's growth strategy, which relies heavily on new store openings and acquisitions, exposes the company to integration and execution risks. The company's ability to effectively manage its supply chain and labor costs will also be crucial in maintaining profitability, particularly in the face of macroeconomic uncertainties.

Conclusion

Valvoline is well-positioned to continue creating shareholder value through its focus on driving the full potential of its core business, accelerating network growth, and innovating to meet the evolving needs of its customers. The company's strong financial performance, with double-digit revenue and profitability growth, and its disciplined capital allocation strategy, including the completion of its $1.6 billion share repurchase program, demonstrate its commitment to enhancing shareholder returns.

While the company faces some near-term challenges related to its ERP system implementation, Valvoline's management team has a proven track record of navigating operational and strategic obstacles. With a robust pipeline of new store openings, a focus on driving higher-margin non-oil change services, and a strong balance sheet to support future growth initiatives, Valvoline appears well-positioned to continue its trajectory of value creation for shareholders.