No one said investing was easy -- a consideration that comes to mind if you're thinking about buying stock in Stanley Black & Decker (SWK 0.83%). There's no doubt the company faces significant near-term headwinds. At the same time, its restructuring plan promises a potential "self-help" pathway to significantly improved profits in a few years.
Here's what you need to know if you're considering buying shares.
Some recent history on Stanley Black & Decker
To understand where Stanley might be headed, it's helpful to look at where it's come from as well. Stanley suffered cost pressures from trade tariffs, unfavorable foreign exchange movements, and commodity cost increases for several years prior to 2020 -- note the decline in gross margin between 2018 and 2020.
However, its fortunes changed in 2020 when widespread lockdowns and stay-at-home measures due to the pandemic boosted spending on home-related goods -- great news for DIY tools makers like Stanley. See the combination of rising revenue and gross margin from 2020 to 2022. At the same time, Stanley's leadership in the e-commerce market for tools proved beneficial during the period.
Data by YCharts.
What went wrong for Stanley Black & Decker in 2022
Eagle-eyed readers will see that gross margin starts to come down for a period before 2022 -- a consequence of rising raw material prices and the much-discussed supply chain difficulties in the economy.
Moving into 2022, investors were hoping for margin improvement as supply chain issues eased, while the integration of its acquisition of outdoor power (lawn and garden products) company MTD Products promised to open up a complementary market for Stanley. Meanwhile, the sale of its electronic security and access technologies (automatic doors) businesses to Securitas and Allegion promised to help refocus the company on its core tools and outdoor products.
Unfortunately, what could go wrong, did go wrong in 2022. Instead of seeing easing supply chains and moderating raw materials prices, Stanley suffered ongoing pressures and rising prices. Management, in turn, slashed full-year earnings guidance throughout the year. In addition, poor weather squeezed outdoor product sales, and worst of all, rising interest rates pressured consumer spending and the housing market -- bad news for Stanley's DIY tools sales.
Having started the year expecting adjusted earnings per share of $12-$12.50 in 2022, management in its most recent guidance projected $4.15-$4.65.
Meanwhile, Stanley and other tools companies are struggling to reduce inventory as sales (organic) declined 5% in the third quarter and are set to decline mid-to-high single digits for the full year.
As discussed recently, Stanley and its industry peers need to improve the rate at which they turn over their inventory. If not, there will be more pressure on margins and earnings.
Data by YCharts.
The case for buying the stock
Given the ongoing weakness in the housing market, there's potential for bad news in the near term. However, management isn't standing still. To address its disappointing supply chain and operational performance, it launched a plan to cut costs by a whopping $2 billion in three years, with $1 billion of the cuts to be implemented in 2023 alone. Among the measures taken, Stanley will reduce its product range and number of suppliers, and fundamentally restructure its supply chain.
Facilities and indirect spending will be cut alongside organizational layers. Management should have taken many of these actions previously, but it probably held off when sales soared after mid-2020. To put the $2 billion worth of cost-saving measures into context, Stanley's operating profit was $2.2 billion in 2021.
Is Stanley Black & Decker a buy for 2023?
If you can close your eyes and ears to the likelihood of near-term bad news and you have confidence in management's execution, then the stock looks attractive to investors. Still, cautious investors will wait to see evidence that Stanley is reducing its inventory effectively and its cost-cutting measures are bearing fruit before aggressively buying in.
