Patterson Companies, Inc. (PDCO)

We believe the company’s LIFO reserve could hold an unpleasant surprise for the 4/22 quarter

Last June, Patterson Companies Inc. (PDCO) experienced an approximate 11% price decline after reporting non-GAAP EPS of 38 cps for its fiscal fourth quarter ended April. This was well below Wall Street’s expectations for 52 cps. The 4/21 quarter’s figure was even below the 4/20 quarter’s non-GAAP number of 43 cents which was the first quarter of Covid when dentist offices were largely closed for 4-6 weeks of the period. This was despite several benefits we considered to be one-time in nature including:

• The effective tax rate fell by 340bp adding 1.6 cents to the 4/21 quarter’s EPS y/y

• Stock compensation fell y/y by $3.4 million adding 2.7 cents y/y

• Losses on the securitization of receivables fell by $1 million adding 0.8 cents y/y

• PDCO still paid next to nothing in marketing as it fell from $8.4 million in 2019 to $5.8 million in 2020 and then $0.1 million in 2021. We’d argue that was at least $1.5-$2.0 million in earnings for the 4/21 quarter which added 1.2-1.6 cents.

• The one headwind was gains on the sale of finance contracts. It was an unusually large $21.8 million in the 4/20 quarter vs. a loss of $1.8 million in the 4/21 period. That is offset by losses on interest rate contract losses of $12.7 million in 4/20 and a gain of $1.8 million in 4/21. We think Covid issues played into that, but that was a net 7.3-cent decline

So how did the company miss targets by that much? Management blamed it on a 9-cps inventory write-down and 10 cps from an unusual increase in its LIFO charge. This article will dive into the details of the LIFO charge and explore the possibility that inflation may result in another disappointing performance in the upcoming 4/22 quarter.