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Earnings Results: Stanley Black & Decker leads S&P 500 decliners after tool maker’s weak quarter leads it to slash guidance

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Shares of Stanley Black & Decker Inc. tumbled 13.7% Thursday to lead S&P 500 decliners after the tool maker’s second-quarter earnings fell far short of estimates, it slashed its guidance and announced cost cuts and an overhaul of its supply chain.

It was the stock’s
SWK,
-14.47%

biggest percentage decline since it fell 13.8% on March 18, 2020.

The New Britain, Conn.-based maker of industrial and household tools posted net income of $87.6 million, or 57 cents a share, for the quarter, down sharply from $459.5 million, or $2.75 a share, in the year-earlier quarter. Excluding one-time charges, EPS came to $1.77, well below the $2.13 FactSet consensus.

Sales rose 16% to $4.4 billion, but also missed the $4.7 billion FactSet consensus.

“We continue to navigate a dynamic macro environment, including inflation, rising interest rates and now late in the quarter, we started to see these factors impact retail customer demand across our global tools and outdoor markets,” Chief Executive Donald Allan Jr. told analysts on the company’s earnings call, according to a FactSet transcript.

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“The significantly slower demand trends in June, combined with a very late start to the outdoor season due to weather, resulted in significant volume pressure versus expectations and revenue landed well below our plan.”

The poor quarter led the company to cut guidance for the full year by a wide margin. The company is now expecting net EPS of 80 cents to $2.05, down sharply from $7.20 to $8.30 previously,

It cut its adjusted EPS guidance to $5.00 to $6.00 from a previous $9.50 to $10.50. The FactSet consensus is for full-year EPS of $9.68.

Mizuho analysts said the massive guidance cut “truncates anything that occurred in the quarter.”

The analysts were bracing for a sizable cut “but this is significantly worse than we could have imagined,” they wrote.

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The magnitude of the cut is a concern and suggests “there are no quick fixes with the transformation now requiring a significant degree of heavy lifting,” they wrote. “The midpoint of the new ’22 EPS guideimplies 21x earnings, which seems expensive relative to history.”

Mizuho rates the stock as neutral. The stock has an average overweight rating among analysts polled by FactSet.

The company has already taken a series of corrective actions, said CEO Allan, and plans to draw down inventory and generate cash flow. Inventory stood at $6.6 billion at quarter-end, up about $400 million from the first quarter, due to softer demand and supply chain constraints.

The company is aiming to cut costs by $1 billion by end-2023 and by about $2 billion in three years. The company is expecting to take three years to overhaul its supply chain, moving closer to customers and to achieve 35%+ adjusted gross margins by reducing its innovation cycle time.

The deterioration in consumer tools and outdoor demand came fast, he said, although professional tool demand remained healthy. Like many other companies, Stanley Black & Decker is competing for consumer dollars at a time when they are already paying more for essentials like food and energy.

“We have seen this phenomenon across many of our global markets as central banks tighten the money supply to control high inflation,” he said.

The company is expecting activity to return to 2019 levels in the latter half of the year, however, and is already seeing easing of the chip shortages and an improvement in other inputs. Tools inventories at some major U.S. clients are below 2019 levels, limiting the destocking risk in other geographies such as Europe.

In the company’s industrial businesses, demand for aerospace fasteners is climbing as narrow-body aircraft production recovers, but the auto sector recovery is sputtering. But construction, repair and remodel, outdoor and the general industrial sector are still looking favorable on a long-term basis, Allan said.

Shares have fallen 46% in the year to date, while the S&P 500
SPX,
+1.24%

has fallen 15%.

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