Tools, outdoor products, and industrial products company Stanley Black & Decker (SWK 0.99%) has been an excellent performer in 2023, but can that continue? To answer that question, you must first ascertain why the stock has done so well and what investors should look for in the future.
Stanley Black & Decker's 2023
The stock has done well, not because its end markets or earnings outlook has improved. Instead, the main reason is the ongoing execution of its cost and supply chain optimization program and its inventory reduction.
Simply put, the company benefited from the stay-at-home measures imposed during the height of the coronavirus pandemic, but going into 2023, it was faced with a few significant issues:
- Tools and outdoor products sales declines as the market corrected from the last boom, and rising interest rates, crimped consumer spending, notably on housing-related matters.
- Supply chain challenges and raw material price increases continue to pressure profit margins.
- The company has excessive inventory as it struggles to generate enough sales volumes to shift it.
As such, management's main operational aim in 2023 was to progress on the following plans:
- Significantly reduce its inventory by the end of 2023 with an initial target set for a reduction of $750 million to $1 billion
- Continue its plan to transform its supply chain and simplify its corporate structure to cut costs by $2 billion by 2025, with $1 billion occurring in 2023.
The good and bad news
The good news, and probably what's taken the stock higher in 2023, is that its cost-cutting plan is on track, with CFO Pat Hallinan telling investors on the second-quarter earnings call, "We are pleased with the progress of our global cost reduction program and are confident in our ability to capture $1 billion of run rate savings by the end of 2023 and $2 billion of run rate savings by the end of 2025."
The figures are significant and a big part of management's aim to get the gross margin back about 35% by 2025 from the 22.4% reported in the second quarter.
Image source: Getty Images.
Turning to the inventory reduction plans, the report card is more nuanced. On the positive side, management cut inventory by $200 million in the first quarter and then $375 million in the second quarter. However, there are some negatives here.
First, the full-year inventory reduction guidance was cut to a new range of $700 million to $900 million compared to the prior range of $750 million to $1 billion. Indeed, Hallinan confirmed that inventory would be "higher than our long-term history of inventory levels, which have obviously changed since we acquired an outdoors business from the legacy Stanley Black & Decker levels".
While this is a cause for concern, it's worth noting that the company's sales outlook has deteriorated (making it harder to shift inventory), and it now expects full-year sales to decline in the mid-single-digit range organically compared to a prior estimate for a low- to mid-single-digit organic sales decline.
While it's tough to beat up the management for its end market environment, the company will still be looking to reduce inventory at the end of the year.
Image source: Getty Images.
Regaining market share
While the restructuring plans are a vital part of the investment case for the stock, they are, arguably, priced into the stock right now -- mainly as they will primarily be achieved by the end of 2023.
As such, it's time to focus on another part of the plan: investments of $300 million to $500 million over the next three years to "accelerate market share gains," in the words of CEO Don Allan on the earnings call. Management is pursuing further investments, and it has powerful brands like Stanley, Black & Decker, Dewalt, and Craftsman it can invest in. Still, there's no guarantee the investments will work to win back market share, and the company is in the throes of a significant restructuring.
Is Stanley Black & Decker stock a buy?
As dull as a conclusion as this is, the stock looks pretty much fairly valued. The stock has a value case, but management believes its 2024 earnings per share will range from $4 to $5, meaning the best-case scenario puts it at slightly less than 20 times 2024 earnings.
That's not so bad, considering there are more cost cuts to come in 2025, but many things can happen between now and 2025, and management has already lowered its sales outlook for this year alongside its inventory reduction plans. Meanwhile, there's still the question of whether it can regain market share.
