Stanley Black & Decker's (SWK 0.99%) stock has fallen on hard times, now down over 50% from its 2021 high-water mark. There are a number of problems being dealt with, but one notable issue is a need to lower operating costs. In an effort to facilitate cost savings, the company is slimming down the number of products it produces by around 70,000. Here's why that shouldn't be as big an issue as it sounds like it should be.
Stanley Black & Decker owns a lot of brands
The name Stanley Black & Decker is itself the amalgam of Stanley Works and Black & Decker, two venerable tool brands. Add to this pair iconic brands like DeWalt, Craftsman, Bostitch, Mac Tools, Lenox, and Irwin, among others. In all, this industrial company is simply a giant in the tool business that was cobbled together through acquisitions over time.
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That's resulted in a lot of redundancy across the company's product lineup. For example, a simple tape measure, an essential tool that professionals and novices alike use, is something many of the company's brands offer. By definition, and because of the inherent simplicity of the product, they're all far more similar than they are different. And still, the company has to make all of them, with unique design, production, labeling, and distribution.
There are clear redundant costs here, and that's just one example. You can imagine the same thing taking shape across various tool categories, from hand tools to power tools. To be fair, there are some products that require the same basic tool to be produced under multiple brands. For example, an electric drill from Black & Decker would be built for and marketed toward a nonprofessional audience, while a DeWalt electric drill would be designed for and sold to professionals. These are different markets with different needs. So the company can't collapse down to a single brand or product to serve all needs.
In fact, there might even be a place for multiple versions of something as simple as a tape measure. For example, a 16-foot tape measure with no bells and whistles might be just fine for everyday home use. If a professional wants that length and simplicity, he or she can buy a Black & Decker-branded tape measure. However, it's more likely that a professional will want a longer, wider, and more robust tape measure, which might come under the DeWalt brand. If a nonprofessional wants that measure, he or she can buy the DeWalt. These are hypothetical examples, but they get the idea across.
The number of products going away is staggering
All of that said, Stanley Black & Decker has already eliminated 20,000 individual products from its lineup. It has plans to kill another 50,000, bringing the total to around 70,000 individual products. That's a huge number of individual products, or SKUs.
Yet management is very confident that the financial impact will be minimal because it has "suitable substitutes" to replace the products that are going away. There are two takeaways from this that investors need to think about.
First, assuming the company can sell replacement products as expected, there are material cost savings that will come along with the pruning process. That will free up production capacity for other, hopefully higher-margin, fare or could allow the company to slim down its factory portfolio, which is another effort being undertaken. While eliminating 70,000 SKUs clearly won't be a simple or quick process, it could end up being well worth the time and effort if it creates a more efficient and profitable organization.
Second, the fact that Stanley Black & Decker has the room to eliminate 70,000 SKUs hints at the depth of the problem the company faces after a long series of acquisitions. Buying companies can lead to swift growth, but it can also lead to inefficiencies over time. That's particularly true if a company ends up being a serial acquirer, like Stanley Black & Decker. It clearly seems as if buying the next company or brand took precedence over fully integrating each new acquisition into the overall company. That it required a deep drop in performance and a huge stock decline to prod management into stepping back and doing the hard work is somewhat disappointing.
Results are heading in the right direction
At this point, Stanley Black & Decker is less than halfway through the product rationalization effort. So there's a lot more work to be done, but at least management, under a new CEO, is finally putting in the effort. And, combined with other projects, the broader turnaround effort is starting to show some promise, with two sequential quarters of adjusted gross margin improvement. For more aggressive investors, this Dividend King might be worth a deep dive, given its historically high dividend yield. And with any luck, this turnaround will be a lesson for management that it needs to take more care when making acquisitions.
