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Sherwin-Williams Company (NYSE:SHW) is the largest U.S. producer of architectural coatings(house paint) by revenue. The company also produces paint and finishes for automobiles and planes. SHW sells its products domestically and internationally through its own retail stores and through third party distributors. Store expansion has played an important role in SHW's revenue growth over the past few years. From 2002-2007, SHW expanded its total number of stores by over 50% through a combination of acquisitions and new store openings.
SHW sells premium (e.g. high priced) paints to professional painters and has benefited from the growth of its core market as homeowners have increasingly moved away from do-it-yourself paint jobs, in favor of hiring professional painters. By the end of 2006, professional paint jobs had grown to 60% of the house paint market. Conversely, the company remains exposed to fluctuations in the U.S. housing market. Existing home sales are directly correlated with home improvements, including paint jobs. In 2007, slumping home sales led to decreased same paint store sales growth for SHW. Nevertheless, the company has been able to continue to grow both revenue and profitability through increased sales to its non-housing customers and continued expansion into China.
[edit] Business Financials
SHW has three business segments: the Paint Stores Group, the Consumer Group and the Global Group:
- The Paint Stores Group consists of 3,046 company-operated specialty pain stores in North America as of Dec 31, 2006, which sell Sherwin-Williams branded paint products to end use customers.[1] This segment of the business accounts for most of their revenues and profits, as seen in the chart below.
- The Consumer Group distributes Sherwin-Williams branded products to third party customers such as mass merchandisers, home centers, independent paint dealers, hardware stores and automotive retailers, among others, for resale to end use customers.[2]
- The Global Group sells Sherwin-Williams branded paint, coatings, and related products internationally through 469 company-operated architectural, automotive, industrial and chemical coatings branches with distribution in more than 20 countries worldwide, primarily in Europe, South America, and Asia.[3]
Sherwin-Williams revenue and operating income grew steadily from 2002-2007, due in large part to its aggressive store openings and acquisitions.
In 2006, Paint Stores Group grew by 11.3% primarily due to strong domestic architectural paint sales to contractors and improved industrial maintenance product sales,[4] and the Global Group grew by 10.3% due to selling price increases and paint and coatings sales volume increases throughout its worldwide operations.[5]
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | ||
|---|---|---|---|---|---|---|---|---|
| Total Revenue ($M) | 5,066.01 | 5,184.79 | 5,407.76 | 6,113.79 | 7,190.66 | 7,809.76 | 8,005.29 | |
| Operating Income ($M) | 424.45 | 497.16 | 522.93 | 580.20 | 656.22 | 834.31 | 912.94 | |
| Operating Margin | 8.4% | 9.6% | 9.7% | 9.5% | 9.1% | 10.7% | 11.4% | |
[edit] Trends and Forces
[edit] Housing Market Weakness
Existing home sales decreased by 20% in 2007, compared to the previous year, and new home sales dropped to their lowest annual volume since April 1995.[7] A significant decrease in the quantity of homes sold results in a decrease in touch-up painting by the seller and remodeling painting by the new resident. Whenever a home is sold, there is usually some remodeling involved, and this remodeling will usually involve some form of repainting. Statistics show that a homeowner who has been in a place for 5 years makes an average of only 0.5 paint transactions per year, while a resident who has been there for 2 years or less makes an average of over 7 times that number. SHW's sales to industrial customers along with its international growth, allowed the company to continue to grow revenue during 2007, but at a much slower rate than in previous years, 2.5% in 2007, as opposed to 9.8% in 2006.
[edit] Ongoing Lead Litigation Could dampen future profits
SHW remains exposed to potential litigation over the lead content of its paint in previous years. The company has been the subject of several lawsuits, notably a lawsuit in Rhode Island, first brought in 2002. Additionally, in 2006 a Rhode Island jury verdict could result in SHW and two other paint manufacturers having to pay billions of dollars to clean up contaminated properties. The case is currently under appeal with an final verdict expected in the summer of 2008.[8]
[edit] Growth of Professional Painting at the Expense of DIY
As U.S. demographics have shifted towards more dual-income families, families have found professional paint jobs to be more affordable, while finding themselves with less time for Do-It-Yourself (DIY) projects has . Over the past 30 years the market share of professionals in the residential paint market has grown from 40% to 60%.[9] SHW is well positioned to capitalize on this trend, because its paint stores target the professional user. Additionally, professional users are more likely to buy the high quality (e.g. high priced) paint produced by Sherwin-Williams, and they are more brand loyal than the more price consumer. Most of SHW sales are to professional painters, so this trend has a large positive effect on their total revenue and profitability. In contrast, competitor Masco sells primarily to DIY customers in their kiosks in Home Depot,[10].
[edit] SHW bets big on China
SHW has announced plans its intention to capture up to 60% of the Chinese paint market, the second largest market for paint products in the world. [11]. In 2004, the company opened several factories in the country dedicated to producing finishes for the Chinese market. 3 years later company opened its first franchise store in Shanghai, and since then has grown its number of stores rapidly. The company's growing exposure to China and other international destinations, has been instrumental in helping the company to weather the downturn in the 2007-2008 downturn in the U.S. housing market.
[edit] Competition
The U.S. coatings market can be split into two major segments, the architectural coatings market and the industrial and commercial coatings market. Architectural coatings include interior and exterior paints stains and varnishes, etc.; Industrial and commercial coating includes auto and other industrial coating. SHW produces in both markets, but mostly in the architectural one, and has different competitors in each.
[edit] The Architectural Coatings Market
The architectural coatings market accounts for about 45% of the total coatings market. From 1999-2004 this segment grew 30% compared to just 10% for the wider market. Sherwin-Williams is by far the largest producer in this market. Its revenues of 7.8 billion dwarf its closest competitors ICI, Benjamin Moore and Masco.
- ICI: ICI was bought out by Akzo Nobel. They both distribute their products to large retailers and operate 450 of their own retail stores in the U.S..[12]
- Benjamin Moore: Benjamin Moore is a privately held company; both ICI and Benjamin Moore have estimated architectural coatings revenues of around $1.5 billion. Benjamin Moore operates about 1,200 signature stores in the U.S..[13]
- Masco:Masco, notable for its line of Behr paints, had architectural segment revenues of $1.78 billion in 2006.[14] Masco sells primarily to the DIY market with kiosks in all 2200+ Home Depot stores nationwide.
[edit] The Industrial and Commercial Coatings Market
Sherwin-Williams is a small player in this segment of the coatings market, which is largely dominated by the large chemical corporations such as Akzo Nobel, DuPont, and PPG. This segment accounts for only about 8% of Sherwin-Williams' yearly sales.
| Company | 2005 Revenue ($M) | 2005 Net Income($M) | 2005 Operating Margin | 2006 Revenue ($M) | 2006 Net Income ($M) | 2006 Operating Margin |
| Sherwin-Williams [15] | 7,191 | 656 | 9.1% | 7,810 | 834 | 10.7% |
| Masco 'Decorative Architectural Products'[16] | 1,681 | 252 | 15.0% | 1,777 | 357 | 20.1% |
[edit] Footnotes
- ↑ Sherwin-Williams 2006 10K Item 1: Business, p. 2
- ↑ Sherwin-Williams 2006 10K Item 1: Business, p. 2
- ↑ Sherwin-Williams 2006 10K Item 1: Business, p. 2
- ↑ Sherwin-Williams 2006 Annual Report, Results of Operations: 2005 v. 2006, p. 35
- ↑ Sherwin-Williams 2006 Annual Report, Results of Operations: 2005 v. 2006, p. 35
- ↑ Sherwin-Williams 2007 10K Item 6: Selected Financial Data, p. 14
- ↑ theREIbrain.com, "January 2008 Real Estate Market Indicators-Market Statistics"
- ↑ CNN Money, "Out of the Gate: Sherwin-Williams Rises", Feb. 21, 2008
- ↑ Bharat Book Bureau, "World Architectural Paints to 2009"
- ↑ Masco 2006 10-k Item 1: Business, p. 4
- ↑ [http://www.tmcnet.com/usubmit/2006/08/22/1823320.htm Sherwin Williams to Open First Franchised Store in China August 22, 2006
- ↑ ICI Paints Stores, "About ICI Paints"
- ↑ Benjamin Moore, "About Us: The Ultimate Retail Experience"
- ↑ Masco 2006 10K Item 8: Notes to Consolidated Financial Statements, p. 66
- ↑ Sherwin-Williams 2006 10-k Item 6: Selected Financial Data, p. 14
- ↑ Masco 2006 10-k Item 1: Business p. 2
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