Stanley Black & Decker (SWK 4.66%) provided its 2022 outlook in the first quarter last year and then cut its guidance in the second and third quarters. When the final tally came in, the numbers were pretty rough compared to 2021.
But that's the past. What does the next year look like? According to management's guidance for 2023, the hard times aren't over yet.
The start and the finish
When industrial company Stanley Black & Decker provided its 2022 outlook, it had high hopes. The original expectation was for adjusted earnings between $12 and $12.50 per share, in guidance offered in February of 2022 (when it released fourth-quarter 2021 results). That expectation range was lowered in the second and third quarters, and it eventually came in at $4.62 per share, down from $10.48 in 2021.
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When all was said and done, 2022 was not a good year for the toolmaker. There were a host of issues, including slowing consumer demand, inflation, supply chain disruptions, high inventory levels, and a balance sheet heavy on leverage (after a recent acquisition). Management isn't shying away from the problems and is working hard to address them.
For example, it sold noncore assets last year with the proceeds used to pay down debt. It has embarked on a cost-cutting plan. It is reducing the number of products it sells to rationalize costs and production. And it has curtailed production so that inventory levels, including in its own warehouses, will fall.
These are all good choices in areas where Stanley has some control. But the company can't do anything about the economy, so its cyclical business will likely feel an additional pinch if there's a recession in 2023.
Another tough year for Stanley Black & Decker
The bigger problem is that none of the company's efforts are quick fixes. Debt reduction started off with a bang in the third quarter of 2022, as management put $3.3 billion toward that. But the noncore asset sales that allowed that were a one-time thing, and the fourth quarter's debt reduction fell to "just" $500 million or so. Mending the balance sheet is a top priority, but it will require some time.
The same is true for inventory, with management saying that this effort could last until 2024. That means lower production throughout most of 2023. Running factories at below-optimal rates will keep costs elevated even as the company cuts costs, leading to continued margin pressure. The current hope is that margins will turn higher again in mid-2023.
If that happens, margins will end the year at roughly the same level as where they started. In other words, at least the first two quarters of 2023 are going to be rough.
NYSE: SWK
Key Data Points
The $2 billion cost-cutting effort is a three-year plan. So it will linger into 2025. Again, no quick fix. With that backdrop, it's not shocking that management tweaked its overall recovery plan a bit, pulling more of its inventory reduction efforts into 2023. If it's going to be a bad year anyway, it makes sense to shove as much bad news as possible into it (everything plus the kitchen sink).
When all of the puts and takes are added together, Stanley is calling for 2023 adjusted earnings to fall between zero and $2 per share. So, in a year's time, the toolmaker is hoping to be turning the corner, which should lead to a better 2024. But until then, investors need to brace themselves for more difficult earnings updates.
Hold your nose
When asked about the safety of the company's dividend, CEO Donald Allan said: "The dividend continues to be a very important part of our capital allocation strategy. We believe that it's a necessary thing for us to maintain the level of the dividend that we have today."
That's good news for the company, which is a Dividend King. And the 3.5% yield is historically high, suggesting that Stanley Black & Decker stock looks relatively cheap right now. If you can handle the uncertainty of the company's turnaround efforts and you're a long-term dividend investor, you should probably take a look at the stock today. Just go in knowing that financial results won't look all that much better in 12 months' time than they look today.
