Power Tool Industry November 2018
Stanley Black & Decker
Q3 sales rose 5.9% to $3.49 billion, short of expectations of $3.59 billion. Profits dropped by 10% from Q3 last year. Net sales rose 4%, with organic growth of 4% and acquisitions adding 2%, which was offset by a 2% decline from currency.
Q3 Conference Call with Analysts:
Tools & Storage contributed 3% revenue growth and 6% organic growth, with price contributing 1% and currency subtracting 3%.
On a geographic basis, North America was up 6% organically with growth across all channels. US retail generated mid-single-digit growth and US commercial markets were up in the high-single digits.
North America’s growth continued to be fueled by new product innovations including FlexVolt, the Craftsman brand rollout and price realizations.
They saw higher-than-expected cannibalization of their legacy brands due to the Craftsman brand transition, Despite that, Craftsman was still a major growth driver for the quarter. They believe the peak of cannibalization occurred in the third quarter; they expect it to lessen in the fourth quarter and next year.
The Power Tools & Equipment SBU delivered 8% organic growth, benefiting from new product introductions and FlexVolt. FlexVolt is now tracking at mid-teens growth year to-date, with growth being led by increased penetration of the system and the new product launches within the category.
Hand Tools, Accessories & Storage delivered 4% organic growth as new product introductions, solid performances and Lenox and Irwin revenue synergies all contributed to growth.
The impact of the Sears bankruptcy will be negligible as far as their actual product sales to Sears, which amount to about $50 million annually. Sears also currently owes them $5.9 million in unsecured debt. As it relates to the Craftsman brand transaction, their future payment obligations remain the same as agreed to, which means they will owe Sears a one-time payment of $250 million in March of 2020 and will begin making quarterly royalty payments related to Craftsman sales. They will continue to honor valid warranty claims for Craftsman products.
They believe the potential impacts from a smaller Sears will clearly be a positive for their Craftsman launch. Should Sears enter liquidation, the deferred revenue liability for the royalty-free license would be reversed into the P&L, partially offset by an increase to their warranty reserve.
Discussing tariffs, they noted that the annual impact of the section 301 tariffs, currently 15%, will increase to 25% in January 2019, with an impact of approximately $250 million, up $200 million from this year.
Items carrying a tariff now represent approximately two-thirds of their imports from China. About 90% of the impact is from finished goods, including mechanics tools, power tool accessories, vacuums and some hand tools. They expect to continue to recoup the impact of the tariffs through pricing, which will be implemented in January.
Should all the remaining imported products be affected by an increase to a 25% tariff, that would represent another $125 to $150 million of additional annualized risk before price mitigation. If it does occur, they believe they are favorably positioned versus competition because about 50% of their North American sales are supported by tools production from North American facilities.
As far as tariff mitigation goes, they are acting first with price increases as well as using the exclusion process when available and have had success through leveraging their supply chain and receiving exemptions from the US government.
Tools & Storage operates with a dual objective of delivering above-market share volume growth while also protecting margins. Operating margins dropped to 16.6% in the third quarter from 17.3% in the third quarter of 2017.
Looking ahead to 2019, they now believe there will be a significant carryover impact from external headwinds, including commodity inflation, currency and tariffs, as well as somewhat slower US residential housing and automotive markets, primarily related to continuing upward pressure on US short-term interest rates. In response, they will be executing a cost reduction program that will deliver about $250 million in
pre-tax savings in 2019.
They now expect to achieve their $1 billion Craftsman growth target by 2021, six years ahead of their prior expectations. So in essence, the Craftsman brand is about 60% ahead of schedule.
Lowe’s and Ace have begun rolling out Craftsman; the rollout will continue in the fourth quarter and be completed in 2019. Amazon will launch metal storage products in the fourth quarter with a broader rollout continuing throughout 2019.
Initial feedback from the Craftsman rollout shows that they are converting new users to the brand, which represents a share gain opportunity for both SB&D and their retail partners. End user feedback has been exceptionally positive.
Ecommerce remains a key commercial driver across both emerging and developing markets and represents a $1 billion high-growth business this year, up from “almost nothing” in 2010.
As far as the Newell Tools acquisition goes, they expect to deliver $100 to $150 million of organic growth from revenue synergies as they broaden the distribution of these products around the world.
SB&D announced an exclusive instore and online partnership for the Stanley and Stanley Fatmax brands with the Home Depot. This program will begin next year.
SB&D launched their inaugural Maker Month, which they termed a celebration of the makers and creators shaping the world around us. Throughout the month of October SB&D encouraged students, parents, school communities and makers of all ages to participate in activities and challenges that build excitement for the power of making. SB&D ran several social media sweepstakes open to makers in the US and Canada excluding Quebec) and contests for schools throughout the month.
SB&Ds investment in MTD Products gives them access to MTD’s private label manufacturing for Craftsman, as well as MTD brands, including Cub Cadet and Troy-Bilt. Both companies also hope the investment will provide access to expanded sourcing opportunities and shared technology.
Milwaukee Tool acquired Imperial Blades. Imperial makes blades for oscillating multi-tools and is the inventor of the universal shank. The company was founded in 2008. Milwaukee plans to keep the Imperial Blades brand. Milwaukee CEO Joe Galli said that the acquisition will expand and strengthen their American manufacturing footprint and expand their portfolio of professional brands. Milwaukee plans to grow and develop the brand and jointly develop new products in the oscillating tool category.
Trimble acquired privately-held Veltec, a fleet management provider that delivers transportation solutions that improve safety and reduce operational costs. Financial terms were not disclosed.
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