(Bloomberg Opinion) -- It has been a rough week for industrial earnings, but Stanley Black & Decker Inc.'s struggles still stand out.
Shares of the maker of power tools were on track for their biggest slump since the spring of 2020 after the company on Thursday chopped its full-year adjusted earnings guidance by almost 20% at the midpoint of the range. While a portion of the reduction reflects the divestiture of its automatic doors business and the shutdown of its operations in Russia after that country's invasion of Ukraine and the enactment of global sanctions, by far the biggest drag on profitability comes from inflation. Stanley said costs for batteries, freight transportation, resins, gas engines and other inputs had increased by a whopping $600 million since the company initially released its 2022 outlook at the start of February. The company is assuming that current market spot prices hold. “Some people view that as maybe potentially conservative,” Chief Financial Officer Donald Allan said on Stanley's earnings call. It's “hard to take that view based on the level of inflation that we've seen over the last 12 months.”
The company is raising prices yet again to deal with this jump in costs, but it can't pass on that burden overnight, and this lag means the benefits from those increases will only partially offset inflationary pressures this year. Worryingly, Stanley is also taking a more cautious view on sales volume in its tool and other outdoor equipment business for the rest of the year as customers digest what will be its fourth price increase over two years. Pricing will be up as much as 8% in the second quarter and almost 10% in the third and fourth quarters. “That's a lot of price in the market very quickly, and so we thought it was prudent to just do a modest haircut on the volume side to represent the potential impact of all those price increases,” CFO Allan said. “But it is not an assumption that there's some significant slowdown related to overall demand.”
To that end, the company said growth in customer purchases at U.S. retailers for its tools and outdoor equipment was stronger than it was in the second half of 2021, with professional construction buyers leading the way. But overall first-quarter volumes in that unit declined 6% even as price increases boosted revenue by 5%. Stanley attributed the shortfall in actual product sales to continued supply chain constraints, particularly the availability of electronic components. It also said that access to chips was improving, that congestion at the U.S. West Coast ports was easing and that disruptions from China's Covid lockdowns are manageable for now.
Inventories jumped $850 million in the quarter compared with the end of 2021, which Stanley said reflected a seasonal buildup ahead of typical summer purchases of lawn mowers and other equipment and a usual spike in demand around the Father's Day holiday in the U.S. But this came on top of already high inventory levels at the end of last year. Because of the inventory buildup — part of which reflects the impact of inflation on the values of those stockpiles — Stanley warned it may fall as much as $1 billion short on its free-cash-flow target this year. The company had announced a $4 billion share repurchase for 2022 in December in conjunction with the divestiture of its security business, a two-part deal valued at a combined $4.1 billion. But as a result of the shortfall in free cash flow, it will now delay a portion of that buyback activity until 2023.
In short, there is a lot of mixed messaging, and it's difficult to parse what's truly going on at Stanley. It's undoubtedly a difficult operating environment for industrial companies right now, but not all of Stanley's shortfall can be explained by macroeconomics. The toolmaker is among a shrinking group of industrial operators that still cater to consumers, and some natural slowdown in that market is to be expected after two gangbuster years of spending on physical goods during the pandemic. But Pentair Plc, which makes pool pumps, filters and lights, said last week that organic sales in its consumer business grew 17% in the first quarter and that price increases allowed it to offset inflation in the period. Carrier Global Corp. said on Thursday that orders for its residential and light commercial heating and air-conditioning business were up 10% in the quarter, a healthy rate after outsize growth a year earlier. The impact of inflation on its earnings at the start of 2022 was also neutralized by price increases.
Stanley appears to be having a much harder time than others. At a certain point, this traces back to management's oversight of the company's operations and its ability to steer expectations. Even after a more than 25% selloff in Stanley's shares this year leading into the earnings report, investors weren't prepared for the news to be this bad. The rejiggering of the stock buyback plans in particular strains the credibility of Stanley's executive team. Things have changed since the company announced the $3.2 billion sale of the bulk of its security business in early December, but have they changed that much? In early March, Stanley announced agreements for the accelerated repurchase of $2 billion of stock and reiterated a goal of completing the full $4 billion buyback this year. The second part of the security divestiture was announced only last week as Stanley inked a deal to sell its automatic door business to Allegion Plc for $900 million. “Net proceeds from the sale are expected to be used to fund Stanley Black & Decker's previously announced share repurchase program as well as debt reduction,” Stanley said at the time. It's an accurate statement, but it looks a bit weird with the benefit of this week's hindsight.
In a season when many industrial companies are delivering disappointing earnings updates, Stanley Black & Decker managed to be an even bigger disappointment than the rest. That's not a distinction that's going to sit well with investors.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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