Well before I began my career fighting for truth, justice, and KrispyKreme (NYSE:KKD) doughnuts, I was a door-to-door salesman (OK, a garage-to-garage salesman) selling a line of hand tools. Without dredging up too many memories that will land me back on my therapist's couch, I would drive around to local garages and repair shops selling wrenches, sockets, ratchets, and pliers out of my car's trunk.
"Pssst! Buddy! Wanna buy some tools?" I'd say as I opened my trunk to reveal my wares.
While they were a bright chrome, felt solidly crafted, and definitely not "hot," it was difficult to compete -- and not feel completely embarrassed -- when the Snap-On (NYSE:SNA) box truck driver would roll in alongside me to sell the repair shop the same tools. In fact, there was no comparison. Every time, the grease monkey would buy Snap-On's products, even if mine were cheaper. Snap-On was "da man's" tools!
Needless to say, I quickly realized I needed a career change. Crime-fighting was decidedly easier than competing against Snap-On.
For all its reach and name recognition, though, Snap-On has been having a tough go of it lately. Even as sales increased 7% for the first six months of its fiscal year compared to the same period last year, operating margins have fallen from 7.6% to 5.7%. The third quarter and second half of the year aren't looking any better.
For the second time in as many months, the Wisconsin-based tool maker lowered its earnings estimates, guiding full-year earnings down to $1.35 to $1.45. Analysts had been expecting $1.74 based on the company's prior guidance of $1.72 to $2.00 given back at the end of July.
It's been a difficult turnaround for the company, one that began back in 2001 when it undertook a series of cost-cutting and consolidation measures. Aside from lower-than-anticipated savings from these measures, Snap-On has been beset by higher raw materials costs, particularly rising steel prices. As Selena Maranjian noted last year, the import tariffs President Bush imposed (and since rescinded) in an effort to help the steel manufacturers reverberated throughout the industry, affecting particularly harshly steel users like Snap-On, Illinois Tool Works (NYSE:ITW), and The Stanley Works (NYSE:SWK). But while Illinois Tool seems to be benefiting from a strengthening global economy and Stanley reported its 37th annual dividend increase, Snap-On is still lagging and hopes things finally right themselves by mid-year 2005. That gloomy outlook caused investors to slap down the company 12% in trading yesterday, making it the third-largest percentage loser on the New York Stock Exchange.
With almost $127 million in cash in the bank, up 17% from last quarter, and as a healthy generator of free cash flow, Snap-On is still a fairly solid company and in no danger of going out of business.
Of course, were that to happen, I might consider going back to selling tools out of my trunk.
Fool contributor RichDuprey likes hand tools but does not really know how to use them. He does not own any of the stocks mentioned in this article.
