Stanley Black & Decker Sees Slightly Lower Growth in 2019

In perhaps a harbinger of a softer economic environment in 2019, diversified industrial toolmaker Stanley Black & Decker (SWK) projects that it will have lower growth in revenue and earnings in 2019. The parent company of its namesake tool labels -- as well as the Craftsman and DeWalt brands, among others -- released fourth-quarter 2018 results on Tuesday before the markets opened. Through the manufacturer conveyed healthy results, shareholders appeared to focus more closely on a muted earnings outlook for 2019.

Let's review pertinent details from the quarter, comments from management, and earnings guidance for the new year below. Note that all comparative numbers in this article are presented against the prior-year quarter (the fourth quarter of 2017).

Stanley Black & Decker: The raw numbers

Data source: Stanley Black & Decker. YOY = year over year. N/A = Not applicable. 

What happened this quarter?

• Stanley's revenue advance of roughly 5% was made up of a 5% expansion in volume, a 1% benefit from increased pricing, and a 2% contribution in new revenue from acquisitions, offset by 3% of negative foreign currency effects. Excluding acquired revenue, the company achieved organic revenue growth of 6% during the quarter.

• Tools and storage, the organization's largest segment, notched a 4% net sales increase to $2.58 billion. The segment was propelled by a vigorous organic revenue improvement of 10% in North America. Management attributed North American momentum to favorable price realization, new product innovation, and the continued rollout of the Craftsman tool brand, which Stanley acquired in 2017 from Sears Holdings.

• Industrial net sales increased by 14% to $549 million, of which 12 percentage points stemmed from revenue obtained from recent bolt-on acquisitions.

• Security net sales dipped 1% to $504 million, as currency impacts and lower volume offset 3 percentage points of growth from acquired revenue, and 1% of improved pricing realization. 

• The company's gross margin fell by 270 basis points to 33.6%. Management cited "external headwinds, including commodity inflation, foreign exchange, and tariffs" for the lower gross profitability.

• Operating margin dipped by 120 basis points to 11.8%, as lower selling, general, and administrative expenses absorbed some of the drop in gross margin. The company generated operating income of $429.3 million, a decline of roughly $21 million against the prior-year quarter.

• Stanley incurred $102.2 million in restructuring charges during the quarter, nearly all of it related to the company's ongoing cost reduction program.

• Due to the finalization of the net effect of the 2017 U.S. tax reform bill, Stanley incurred a tax rate of 129% during the quarter, resulting in tax expense of $287.7 million, versus $60.6 million in the fourth quarter of 2017.

• The restructuring charges and tax expense were the primary culprits in converting Stanley's operating income into the net loss shown in the table above.

Image source: Stanley Black & Decker.   

What management had to say

In Stanley's earnings press release, CEO James Loree lauded the company's numerous top-line drivers. Loree also affirmed the company's focus on converting revenue improvements into higher earnings: "We continue to be well-positioned to deliver share gains as we leverage our robust growth catalysts, which include the continued Craftsman brand rollout, Lenox and Irwin [acquisition] revenue synergies, FlexVolt [handtool batteries], e-commerce, emerging markets and new innovations. The organization is keenly focused on margin accretion as we realize the benefits from our $250 million cost reduction program, execute price recovery actions in response to external headwinds, and implement an array of new margin enhancement initiatives."

Looking forward

Stanley Black & Decker appears to be cautious heading into the new year. The external headwinds of tariffs, commodity inflation, and foreign currency impacts -- which the company blamed for its slimmer gross margin in the fourth quarter -- also figured in its 2019 outlook provided alongside earnings. 

Management is expecting organic revenue to ascend 4% year over year in 2019, versus the 5% rate recorded in 2018. Full-year diluted earnings per share are anticipated to fall between $7.45 and $7.65. On an adjusted basis, diluted EPS is slated to land between $8.45 and $8.65. At the midpoint of this range, adjusted earnings will exceed 2018's mark of $8.15 by 4.6%. This credible performance will nonetheless mark a slower pace than the 9% EPS growth realized in 2018 versus 2017.

Stanley's wary outlook and prim estimates caught shareholders off guard; the SWK symbol fell 15.5% in the trading session following the company's earnings release. To date, shares have lost nearly one-third of their value from the beginning of 2018, and now trade at just 12 times one-year forward earnings. Any further deterioration in Stanley stock may begin to attract value-oriented investors.