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Miscellaneous Retail Industry Outlook: Prospects Look Bright

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The Valspar Corporation VAL saw its earnings (as reported) decline roughly 9.2% to 99 cents per share in second-quarter fiscal 2016 (ended Apr 29, 2016) from $1.09 in the prior-year quarter.
 
Adjusted earnings (barring non-recurring items including merger-related expenses of $18 million) came in at $1.22 per share in the fiscal second quarter, up from $1.11 recorded a year ago. However, earnings missed the Zacks Consensus Estimate of $1.26 per share.
 
Revenues fell roughly 2.1% year over year to $1,056.8 million in the reported quarter. Foreign currency translation unfavorably impacted net sales by 3%. Sales also lagged the Zacks Consensus Estimate of $1,120 million.
 
 
Sales from Valspar’s larger Coatings segment fell 4% year over year to $587 million in the fiscal second quarter. Foreign currency translation hurt sales by 4% while acquisitions contributed 1%. Sales volumes increased 2% in the quarter. The segment continues to display strength with volume growth in the Coil, Wood and Packaging product lines. 
 
Revenues from the Paints segment improved 1% year over year to $407 million in the reported quarter. Currency fluctuations hurt sales by 2%. This was more than offset by acquisitions which contributed 11% to net sales. Volumes decreased 6% in the quarter as lower sales in North America and Asia were partly offset by a 6% increase in sales volume due to acquisitions. The segment saw significant positive impact from the Quest acquisition. 
 
Financials
 
Valspar ended the fiscal second quarter with cash and cash equivalents of around $100.3 million, down 31.4% year over year. Long-term debt increased around 26.4% year over year to roughly $1,707 million.
 
Valspar paid a quarterly dividend of 33 cents per share to its shareholders. The company suspended share repurchases for the reported quarter as well as the rest of fiscal 2016.
 
Proposed Merger
 
Valspar and Sherwin-Williams SHW entered into a definitive merger agreement in Mar 2016. Per the deal, Sherwin-Williams is buying Valspar for roughly $11.3 billion or $113 cash per share. If the proposed merger is approved by Valspar’s shareholders and regulatory bodies, the deal will likely conclude by the first quarter of calendar year 2017. 
 
The companies expect that ‘no or minimal divestitures’ should be required to complete the transaction given the benefits it will offer to customers (including an enhanced product range) and its complementary nature. Should the required divestitures of businesses total more than $650 million of Valspar's revenues for 2015, which both companies believe to be unlikely, the transaction price would be adjusted to $105 in cash per Valspar share.
 
Additionally, Sherwin-Williams can terminate the deal if the required divestitures exceed $1.5 billion of Valspar’s 2015 revenues.
 
Guidance
 
Valspar, which is one of the prominent paint makers, along with Akzo Nobel AKZOY and PPG Industries PPG, withdrew its guidance for fiscal 2016 in light of the impending merger. 
 
Zacks Rank
 
Valspar currently carries a Zacks Rank #3 (Hold).
 
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