Stanley Black & Decker (SWK 0.85%) posted adjusted earnings of $4.52 per share in 2022, down from $10.18 in 2021. It came into 2023 expecting adjusted earnings to fall between breakeven and $2 per share, continuing the downtrend. Yet, the industrial company has been executing well on its turnaround plan. Here's what you need to know.
Stanley Black & Decker has had two bad years
As the earnings numbers above highlight, 2022 and 2023 have not been particularly good years for the company. There have been a number of headwinds, including excess inventory (much of it higher-cost because of inflationary issues in the supply chain), a heavy debt load (left behind from a string of debt-funded acquisitions), and a bloated list of similar products (another remnant of the acquisition spree). The depth of the issues the company faced as it entered 2023 is highlighted by the projected decline in adjusted earnings from over $10 per share in 2021 to less than $2.
SWK Total Long Term Debt (Quarterly) data by YCharts.
So far, the company has been making notable headway in its efforts to get the business back on track. Inventory levels have been reduced by $880 million through the first three months of 2023 and are down by $1.7 billion since mid-2022. Long-term debt levels have fallen dramatically from their 2022 peak. The company has eliminated over 20,000 products, many of which were simply redundant (e.g., offering the same basic tape measure across multiple brands), from a list of around 70,000 that it plans. Stanley Black & Decker is struggling, but it is also executing on its stated goals.
The biggest area where this is showing up, however, is the adjusted gross margin. At 28% in the third quarter, this figure has risen each quarter since bottoming out at 20% in the fourth quarter of 2022. In fact, the improvement has been faster than anticipated, leading management to update its adjusted earnings guidance range to $1.10 to $1.40 per share. The top end is down from the $2.00 per share guidance at the start of the year. But the worst outcome clearly didn't materialize since the $1.10 new low end is much better than the break-even expectation at the start of 2023.
Still on track for 2024, according to management
Basically, it looks like the turnaround effort at this industrial company is working. This helps explain why the stock has picked up a bit since third-quarter earnings were announced. That's the little uptick at the very end of the graph below. But it is also apparent that Stanley Black & Decker remains well below its recent high-water mark. In fact, the 3.6% dividend yield remains historically high for this Dividend King.
If things keep going as planned, it could be a good time for long-term dividend investors to take a deeper look at Stanley Black & Decker. On that front, the company's earlier turnaround projections are an important line in the sand. Previously, the company had talked about the possibility of earnings rebounding to $4 per share or higher in 2024. That would represent a huge improvement over 2023 and might result in investors reevaluating the shares in a much more positive light.
Notably, when asked about the 2024 outlook, the company says it's expecting ongoing gross margin improvement driven by the continuation of its turnaround efforts. That, in turn, gives the company confidence that it will be able to reach its previous adjusted earnings target of $4 or so next year.
Things are looking up for Stanley Black & Decker
To be fair, Stanley Black & Decker hasn't yet given official guidance for 2024. The $4 per share adjusted earnings guidance goes back to its original turnaround plan presentation, and the backing for that figure came out of an analyst question. So, investors may not want to take that number to the bank, so to speak. However, it is very clear that 2023 seems likely to be the bottom at this point. If the future is looking better for earnings, it isn't the least bit unreasonable to think that Wall Street will start to see the silver lining here before too long. You might want to dig in before the crowd catches on to the ongoing improvements taking shape.
