Executive Summary / Key Takeaways

• Sherwin-Williams demonstrated resilience in the first quarter of 2025, exceeding profit estimates despite a slight revenue decline, driven by effective price realization in the Paint Stores Group and disciplined cost control across the organization.
• The company's core investment thesis remains centered on its differentiated "Success by Design" strategy, leveraging its extensive controlled distribution network and proprietary technology to drive above-market growth and profitability, particularly in the professional architectural segment.
• Strategic initiatives, including targeted acquisitions (like BASF's Suvinil in Brazil) and ongoing investments in new stores, digital capabilities, and manufacturing capacity, are aimed at expanding market reach, enhancing operational efficiency, and capitalizing on competitive disruptions.
• While management anticipates the macroeconomic environment and demand to remain choppy through at least the first half of 2025, reaffirming full-year guidance signals confidence in the company's ability to offset headwinds through strategic execution, price management, and anticipated second-half earnings acceleration.
• Key factors for investors to monitor include the timing and pace of market recovery, the impact of raw material costs and potential tariffs, successful integration of recent acquisitions, and the company's ability to navigate ongoing environmental and litigation risks.

The Sherwin-Williams Company, founded in 1866, has evolved from a manufacturer of paints and pigments into a global leader in the development, manufacture, distribution, and sale of paints, coatings, and related products. With a history marked by strategic growth, including significant acquisitions like Valspar in 2017 and recent targeted divestitures and purchases, the company operates through three primary segments: the Paint Stores Group, Consumer Brands Group, and Performance Coatings Group. This structure, particularly the extensive company-operated store network within the Paint Stores Group, forms the backbone of its differentiated "Success by Design" strategy, aimed at providing customers with solutions that enhance their productivity and profitability, thereby driving sustained above-market growth.

Central to Sherwin-Williams' competitive moat is its unique controlled distribution model, primarily within the Paint Stores Group. With 4,773 company-operated stores as of 2024, this network provides direct access to professional contractors and DIY customers, enabling superior service, technical support, and inventory management. This direct relationship translates into significant pricing power, contributing to higher margins (gross margins consistently in the 45-48% range) compared to competitors relying more heavily on third-party retail channels. The efficiency of this network also results in lower operating costs per unit, estimated to be 10-15% lower than more fragmented distribution models.

Beyond distribution, Sherwin-Williams leverages proprietary technology in its coatings formulations. While specific quantitative performance metrics for all technologies are not publicly detailed, the company's advanced coatings are designed for tangible benefits such as improved application efficiency (estimated 15-20% greater), leading to lower operating costs for customers. R&D efforts are focused on developing next-generation products, including those targeting reduced material waste (a stated goal of 30% reduction) and enhanced durability, which, despite potentially higher upfront costs (e.g., 10% higher), aim for lower lifetime costs (e.g., 25% lower). This technological edge, coupled with the service provided through its stores, strategically positions Sherwin-Williams to capture premium segments and counter competitors like RPM (RPM), which often compete on cost, and AkzoNobel (AKZOY), which focuses on B2B innovation. The company's R&D investment, while slightly lower than some rivals like PPG (PPG), is strategically aligned with its core markets and customer needs, supporting faster innovation cycles in key areas.

In the first quarter of 2025, Sherwin-Williams demonstrated the effectiveness of its strategy in a challenging macro environment. Consolidated Net sales decreased slightly by 1.1% year-over-year to $5.31 billion, primarily impacted by unfavorable foreign currency translation and softer demand in the Performance Coatings and Consumer Brands Groups. However, the company's focus on price and cost control yielded positive results. Consolidated gross profit increased, with the gross profit margin expanding to 48.2% from 47.2% in the prior year, driven by higher selling prices in the Paint Stores Group and supply chain efficiencies, despite lower overall volumes. Selling, general and administrative (SGA) expenses decreased by $6.0 million, reflecting effective cost control, although SGA as a percentage of sales increased slightly due to the top-line decline. Income before income taxes increased by 2.0% to $653.0 million, and diluted net income per share rose 1.5% to $2.00, exceeding analyst estimates. Adjusted EBITDA grew 4.6% to $937.0 million, achieving a margin of 17.7%.

Segment performance in Q1 2025 highlighted the company's strengths and areas of pressure. The Paint Stores Group, the largest segment, saw sales increase by 2.3% to $2.94 billion, driven by mid-single-digit selling price increases that more than offset a low-single-digit volume decrease. This segment continued to see strong performance in Residential Repaint (mid-single digit growth, capturing market share), Protective & Marine (high-single digit), and New Residential (low-single digit), while Commercial and Property Maintenance remained under pressure. The segment margin expanded to 18.4%. The Consumer Brands Group experienced a 6.0% sales decrease to $762.2 million, primarily due to soft North American DIY demand and unfavorable FX (-3.3%). Despite lower sales, adjusted segment margin expanded due to supply chain efficiencies and cost discipline. The Performance Coatings Group's sales decreased by 4.8% to $1.60 billion, impacted by unfavorable FX (-2.6%) and lower volumes/price mix, though acquisitions provided a low-single-digit tailwind. Packaging was a bright spot with high-single-digit growth, but other divisions faced pressure. The segment margin decreased to 13.3%.

Sherwin-Williams maintains a strong financial condition and liquidity position. At March 31, 2025, the company had $199.8 million in cash and cash equivalents and total debt outstanding of $10.78 billion (net debt of $10.58 billion). While net operating cash flow was a usage of $61.1 million in Q1 2025 due to seasonal working capital build, this was funded by an increase in short-term borrowings. The company has ample unused capacity under its credit facilities ($2.15 billion) and expects to remain in compliance with its leverage covenant (target 2.0x-2.5x Net Debt/EBITDA). Capital allocation remains disciplined, with $552.1 million returned to shareholders through dividends and share repurchases in Q1 2025. Capital expenditures were $189.3 million, including investments in the new global headquarters (final financing proceeds of $800 million received in Q1), manufacturing capacity expansion, and new store openings. The company expects 2025 CapEx to be slightly less than 2024, funded primarily by operating cash flow.

Looking ahead, Sherwin-Williams is reaffirming its full-year 2025 guidance, signaling confidence despite the anticipated continuation of a choppy macroeconomic environment, particularly in the first half. Management expects demand to remain uncertain, with some end markets potentially not gaining momentum until 2026. Full-year consolidated sales are projected to be up a low single-digit percentage. Adjusted diluted net income per share is guided in the range of $11.65 to $12.05, representing a mid-single-digit increase at the midpoint ($11.85) over 2024. This guidance incorporates expectations for raw material costs to be up a low single-digit percentage (likely at the higher end due to tariffs), SG&A dollars to grow by a low single-digit percentage (including $80 million in new building operating expenses weighted to the second half), and increased interest expense ($40 million from refinancing, $20 million from new buildings). Other general expense is expected to increase by approximately $75 million, reflecting a return to more historic levels after gains in 2024 and a higher environmental provision. The outlook anticipates earnings growth to be more heavily weighted towards the second half of the year. Strategic priorities for 2025 include opening 80 to 100 new stores, executing on simplification and digitization initiatives, and integrating recent acquisitions like BASF's (BASFY) Brazilian decorative paints business, expected to close in the second half.

Despite its strong positioning, Sherwin-Williams faces notable risks. Macroeconomic turbulence, including persistent inflation, high interest rates, and potential recessionary conditions, could further dampen demand across segments, particularly in DIY, commercial construction, and property maintenance. Raw material cost volatility and the impact of new tariffs could pressure margins if price increases or cost controls are insufficient to offset them. The company faces significant, long-standing environmental liabilities, particularly related to the Gibbsboro, NJ site, and ongoing lead paint litigation, which, while management does not expect them to materially impact financial condition or liquidity due to the extended resolution period, could result in material charges to net income in future periods depending on investigation outcomes, remediation plans, and legal decisions. Integrating recent and pending acquisitions, such as BASF's Brazilian business, carries execution risk. Furthermore, fluctuations in foreign currency exchange rates can impact reported results, as seen in Q1 2025.

Conclusion

Sherwin-Williams operates from a position of strength, leveraging its differentiated business model, strong brand, and technological capabilities to outperform in a challenging market. The first quarter of 2025 demonstrated the company's ability to protect profitability through effective pricing and cost management, even as demand remained choppy. The core investment thesis is underpinned by the company's strategic focus on professional markets through its extensive store network, its ability to drive productivity for customers with advanced coatings technology, and its disciplined approach to capital allocation and operational efficiency. While macroeconomic headwinds and specific segment pressures are expected to persist in the near term, the reaffirmation of full-year guidance, coupled with planned investments in growth initiatives and acquisitions, signals management's confidence in a stronger second half and continued market share gains. Investors should weigh the company's proven resilience and long-term growth potential against the ongoing uncertainties in demand, raw material costs, and potential impacts from environmental and litigation matters. The company's ability to execute its "Success by Design" strategy, particularly in capitalizing on competitive disruptions and realizing the benefits of its technological leadership and distribution advantages, will be key to delivering value in the current environment and beyond.