Business Overview and History: Valvoline Inc. (VVV) is the quick, easy, and trusted leader in the automotive preventive maintenance industry, 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.
Valvoline has a rich history dating back to 1866 when Dr. John Ellis first formulated the revolutionary lubricant that would eventually become the Valvoline brand. The company began as Valvoline Oil Company and was the first to develop a motor oil specifically for the automotive industry. In the early 1900s, Valvoline became a leading supplier of lubricants to the growing automobile industry. During the 1920s, Valvoline expanded its product line and began selling motor oil through service stations across the country, marking the beginning of its transition from a wholesale lubricant supplier to a consumer-focused brand.
In the 1980s, Valvoline was acquired by Ashland Inc., a major chemical company. Under Ashland's ownership, Valvoline focused on expanding its retail service center operations, which became known as Valvoline Instant Oil Change. This provided customers with a quick, convenient option for routine automotive maintenance and repair. In 2016, Valvoline separated from Ashland Inc. and began trading publicly on the New York Stock Exchange. Since then, the company has made strategic acquisitions to expand its geographic footprint and service offerings, while also investing heavily in marketing and technology to enhance the customer experience at its Valvoline Instant Oil Change and Great Canadian Oil Change locations.
Throughout its history, Valvoline has faced challenges such as increased competition from other quick lube chains and the impact of economic downturns on automotive maintenance spending. However, the company's focus on providing a trusted, high-quality service experience has allowed it to maintain its leadership position in the industry. Valvoline's commitment to innovation, customer service, and brand-building has been instrumental in its continued success.
Financial Performance and Ratios: Valvoline's financial performance has been resilient, with the company reporting annual revenue of $1.44 billion and net income of $1.42 billion for the fiscal year ended September 30, 2023. The company's gross profit margin stood at 37.9%, while its operating profit margin was 19.7%. Valvoline generated $353 million in operating cash flow and $124 million in free cash flow during the same period.
For the most recent quarter (Q3 2024), Valvoline reported revenue of $421.4 million, representing a 12.0% year-over-year growth. However, net income decreased by 25.0% to $45.9 million, primarily due to higher interest expenses. Operating cash flow for the quarter was $75.6 million, a 69.8% decrease from the prior year, mainly due to changes in working capital. Free cash flow also saw a significant decrease of 92.0%, reaching $9.8 million, attributed to higher capital expenditures and interest payments.
Liquidity: The company's balance sheet remains strong, with a current ratio of 0.73 and a quick ratio of 0.62 as of September 30, 2023. Valvoline's debt-to-equity ratio stood at 10.79, reflecting the company's leveraged position. As of the latest reporting period, Valvoline had $65.7 million in cash and $296.8 million available under its $475 million revolving credit facility, providing ample liquidity for operations and growth initiatives.
Quarterly Performance and Outlook: In the third quarter of fiscal 2024, Valvoline reported net revenues of $421.4 million, a 12% increase compared to the prior-year period. This growth was driven by system-wide same-store sales (SSS) expansion of 6.5%, with both company-operated and franchised stores contributing to the strong performance. Adjusted EBITDA increased 12% to $123.2 million, despite headwinds from higher interest expense.
For the full fiscal year 2024, Valvoline expects to be towards the low end of the revenue range, with same-store sales at or slightly below the midpoint of the guidance range. For EBITDA and EPS, the company expects to be at or slightly below the midpoint of the guidance range. These adjustments are primarily due to the impact of a CrowdStrike outage and a recent refranchising transaction.
Expansion and Growth Initiatives: Valvoline continues to execute on its growth strategies, adding 33 new stores in the third quarter of fiscal 2024, including 15 franchise locations. This brought the company's total system-wide store count to 1,961 as of June 30, 2024, representing an 8.7% increase over the prior year. For the full year, Valvoline expects to be at or above the midpoint of the 140 to 170 million range for new store additions.
In July 2024, Valvoline announced the completion of a transaction to refranchise 17 company-owned service center stores in the Las Vegas market to a long-standing franchise partner. This capital-efficient move aligns with the company's strategic focus on accelerating franchise growth. The refranchising transaction is expected to have a relatively modest impact of less than $2 million of EBITDA for the remainder of FY2024.
Additionally, Valvoline has been investing in enhancing its service offerings and capabilities to capture new customer segments, such as fleet managers. The company's fleet business, which represents less than 10% of sales, has been growing at a faster rate than the overall business, driven by both ticket and transaction growth from new and existing fleet accounts.
Business Segments: Following the sale of its Global Products business to Aramco Overseas Company B.V. on March 1, 2023, Valvoline now operates primarily through its Retail Services segment. This segment includes both company-operated and franchised service centers under the Valvoline Instant Oil Change and Great Canadian Oil Change brands. The Retail Services segment has demonstrated strong performance, with net revenues increasing 12% year-over-year in the third quarter of fiscal 2024. The segment's gross profit margin was 39.7% in the third quarter, slightly lower than the prior year period due to increased store operating expenses, including higher depreciation.
The results of the former Global Products business are now reported as discontinued operations in Valvoline's financial statements. For the nine months ended June 30, 2024, Valvoline recognized a loss from discontinued operations, net of tax, of $6.2 million, which included the recognition of the gain on the sale of the Global Products business in the prior year period.
Industry Trends and Market Position: Valvoline operates primarily in the United States and Canada, leveraging its strong brand recognition and extensive network of approximately 2,000 service center locations. The automotive maintenance and repair industry has seen steady compound annual growth rate (CAGR) of 3-5% in recent years, driven by factors such as increased vehicle miles driven and an aging vehicle population.
Valvoline's strategy is focused on three key pillars: driving the full potential of the core business, accelerating network growth, and expanding customer and service offerings. The company has demonstrated its ability to capitalize on industry trends, achieving 18 consecutive years of same-store sales growth.
Challenges and Risks: Valvoline's successful execution has not been without its challenges. In the third quarter of fiscal 2024, the company faced increased competitive advertising activity in certain markets, which put pressure on customer acquisition costs. Additionally, the company encountered temporary operational disruptions related to a global cybersecurity incident, which impacted a small portion of its revenue during the quarter.
The company's recent implementation of a new enterprise resource planning (ERP) system also resulted in a material weakness in internal controls, which the management team has been actively addressing through a remediation plan. While the company believes the material weakness will be fully remediated by the end of fiscal 2024, the ERP transition poses ongoing risks that require close monitoring.
Conclusion: Valvoline's strong brand recognition, focus on customer service, and strategic initiatives have positioned the company as a leader in the automotive preventive maintenance industry. Despite the near-term challenges and slight adjustments to its full-year guidance, the company's resilient financial performance, robust expansion plans, and innovative service offerings suggest a bright future. As Valvoline continues to execute on its strategic priorities, investors should closely monitor the company's progress in navigating the evolving industry landscape and delivering long-term shareholder value. The company's ability to adapt to changing market conditions, capitalize on growth opportunities in its fleet business, and successfully integrate new franchised locations will be crucial factors in its ongoing success.