Q2 2024 Earnings Summary
- SWK is ahead of schedule in improving gross margins, expecting adjusted gross margins to approximate 31% by the third quarter due to accelerated cost savings, even in a challenging market environment.
- The company is confident in achieving 35%+ adjusted gross margin within the transformation time horizon, and as markets improve, they are building an operating model around organic growth that can grow 2 to 3 times the market, aiming for mid- to high single-digit growth over the long term.
- SWK has strong conviction in the long-term growth potential of its end markets, serving professional and consumer markets linked to construction and repair, and believes that as interest rates change, it will unlock long-term potential, leading to future volume inflection points.
- SWK is approximately $1.5 billion in revenue down from their original 2022 assumption, reflecting significant shortfalls in sales expectations.
- Gross margin improvements are driven by accelerated cost savings in response to soft volumes in a soft macro environment, which may not be sustainable long-term.
- The company's key markets are interest rate-sensitive, and high interest rates may delay the timing of volume recovery and growth.
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Long-term Earnings Potential
Q: What is a realistic normalized EBITDA margin, considering cost reductions and investments?
A: Management is confident in achieving 35%+ gross margin in the given time horizon and believes the company can grow 2–3 times the market, aiming for mid- to high single-digit growth over the long term. They see this as a 40%-ish margin business as growth leverages margins and expect investments to trend closer to $500 million. Returning to previous earnings levels does not concern them; it's just a matter of timing.
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Earnings Trajectory and Guidance
Q: Can you elaborate on the earnings trajectory and provide guidance on revenue, margin, and tax rate?
A: Management confirmed the EPS flow: flattish in Q3, up $0.40 sequentially in Q4. They project fourth-quarter revenue to be slightly north of $3.5 billion with operating margin between $300 million and $330 million. The tax rate for next year is expected to be in the high teens, approaching 20%.
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Organic Sales Growth Reduction
Q: Explain the slight reduction in organic sales growth and expectations for tools and storage.
A: The company had a growth quarter despite a soft macro environment, driven by a traditional outdoor season, electric products, and DEWALT's fifth consecutive quarter of growth. However, they expect DIY to remain soft and the Tools and Outdoor business to be down slightly in the back half, averaging down 100 basis points due to a soft consumer and the end of the outdoor season. SG&A for the year will be slightly above 21%, with no significant change expected next year.
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Gross Margin Outlook
Q: How does the 31% gross margin divide between Q3 and Q4?
A: The company expects to finish the year at 30% gross margin, with the fourth quarter in the low 30s, specifically north of 31%. The third quarter gross margin is expected to be at or slightly below 31%. They are confident in their trajectory and aim to reach mid-30s gross margin by the end of next year.
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Near-term Gross Margin Improvement
Q: Explain the gross margin improvement to approximately 31% by Q3, given historical seasonality.
A: Gross margin progression has been influenced by factors like timing of expensive inventory coming off the balance sheet. The improvement is due to accelerated savings in late 2023 and early 2024 despite soft volume. The increase from first half to back half is driven more by savings cadence than traditional seasonal dynamics.
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Consumer Behavior Trends
Q: What are you seeing regarding consumer variability and its impact on trends?
A: The professional segment is relatively stronger than the consumer, a trend expected to continue. Consumers are responding more favorably to promotions, which benefits the company as they return to normal promotion levels. They anticipate an uneven environment going forward but see potential upside through supply chain transformation and investments targeting professionals.
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Operating Environment and Promotions
Q: How are retailers thinking about year-end promotions, and where are you focusing investments?
A: The operating environment in the back half is expected to be similar to the front half. The company is returning to normal promotional support levels and is excited about plans with retailers, especially promoting the accretive cordless power tool segment. Investments are focused on STANLEY, CRAFTSMAN, and DEWALT brands, with emphasis on digital marketing and adding field resources to engage customers.
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Point-of-Sale Trends
Q: Can you provide an update on point-of-sale trends through the quarter and into July?
A: Point-of-sale was modestly positive throughout the quarter, driven by a normal outdoor season and overperformance in DEWALT. As the quarter ended and the outdoor season peaked, trends returned to a more flat perspective. The company expects the market to be flat in the back half of the year.
Research analysts covering STANLEY BLACK & DECKER.