Industrial products and toolmaker Stanley Black & Decker (SWK 0.99%) is on the right track. Its restructuring and cost-cutting measures are improving its profit margins, and the plan to reduce its bloated inventory is progressing in line with management's aims.
It's a turnaround story and a dividend stock (current yield of 3.8%) that will attract income-seeking investors. So, does it all add up to make the stock a buy?
Stanley Black & Decker makes progress
To understand the investment case for the stock, it's a good idea to go back to the start of the pandemic. Following a spree of acquisitions (including purchasing the Craftsman brand and Newell Brands tools businesses, Irwin and Lenox) intended to consolidate the tools industry, Stanley entered 2020 with a powerful set of DIY and professional tools brands.
It also owned a 20% stake in lawn and garden products maker MTD Products, which Stanley would buy outright in 2021. Clearly, the ongoing plan was to restructure the company toward its core tools products. Indeed, Stanley would continue its plans by selling its security products business to Securitas and its automatic entrance doors business to Allegion in the summer of 2022.
It was a plan that ultimately benefited from the pandemic, as demand for DIY equipment and home-related products surged due to stay-at-home measures. For example, its Tools & Storage segment reported organic growth of 25% in the fourth quarter of 2020, and then 20% growth for 2021.
What went wrong for Stanley Black & Decker?
While management's strategy made perfect sense, and the company enjoyed surging sales, its execution deserves some circumspection. Sales surged during the pandemic, but so did Stanley's inventory.
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Moreover, while the lockdown measures caused sales to soar, the pandemic also created significant supply chain issues and raw material inflation that pressured Stanley's margins. It's also somewhat ironic that the strong sales growth encouraged management to hold off making long-overdue cost-cutting and restructuring actions aimed at reducing the complexity of its supply chain.
As such, when sales eventually started declining, the company found itself with bloated inventory, an overly complex supply chain, far too many stock-keeping units (SKUs) (corporate jargon for unique products), too many suppliers, too many facilities, and too many layers of management. All of this wasn't helped by the pace of its acquisitions in recent years.
Image source: Getty Images.
Management's turnaround plan is working
Fast-forward to 2022, and new CEO Don Allan launched a major restructuring plan to cut costs by $2 billion by 2025, with a $1 billion cut in 2023 alone. Here are the details of Stanley Black & Decker's plan. It involves addressing all the issues outlined above.
The good news from the company's latest results is the plan is on track. Stanley is set to reduce inventory by $1 billion in 2023, and with $875 million stripped out of costs since the plan's inception, CFO Pat Hallinan believes Stanley can "deliver or slightly exceed our $1 billion run rate savings target this year and to deliver $2 billion run rate savings by 2025" with ongoing margin expansion in tow.
Two reasons for caution
It's a compelling investment proposition, but I see a couple of notes of caution.
First, while it's true that Stanley's inventory is being reduced, it's also a fact that its sales are still in decline. As such, its inventory-to-sales ratio remains at a relatively high historical level.
Fundamental Chart data by YCharts
Second, Allan plans to play offense. It's not just about reducing SKUs and cutting costs; he's also clear that Stanley needs to invest $300 million to $500 million over the next three years to turn the company into a "market share-gaining machine."
That might not prove easy, as rivals like Techtronic Industries (owner of the Milwaukee and Ryobi brands) appear to have stolen a march by being an early investor in cordless power tools. The Milwaukee brand (aimed at professional users) outpaced its market's growth and generated organic sales growth of 8.7% in the first half of 2023.
Moreover, in a recent press release, Techtronic's management recently affirmed, "We are excited about the opportunities in our professional business and continue to strategically invest in Milwaukee to fuel our double-digit growth target in the second half of 2023 and beyond."
A stock to buy?
All told, Stanley Black & Decker is making progress, but it will take time to reduce inventory in line with sales growth. In addition, it's not easy for a company to regain market share when undergoing significant restructuring in a weakening end market. Moreover, Stanley's problems may have caused it to fall behind Techtronic in developing new products.
As such, the risk in Stanley's plans might outweigh the potential reward, making the stock look expensive at 18 times the estimated 2024 earnings.
