Acuity Brands (AYI) is trading 9% higher despite missing sales estimates after reporting improved profitability this morning.
The lighting market leader missed on the top line, but revenue still grew 3% to a record for the seasonally slow second quarter. The company instituted price increases in the first quarter to combat higher input costs and tariffs on Chinese supplies. Management warned that demand had been pulled forward in the first quarter three months ago. As a result, the modest miss on the top line was not a huge concern as the company's adjusted operating margins returned to yr/yr expansion.
Sales volume grew by 3%, which was down from 11% last quarter due to a pull forward of demand ahead of price increases. Price increases accounted for most of the 2.7% sales growth. Management noted that that applies to only a one-third mix while two-thirds of its business operates on bidding for projects.
Commercial and Industrial (C&I) volumes fell, but sales were up 5% over the first half of the year, normalizing for the pull forward of demand. The corporate accounts channel was up 10% due to sales of Atrius-enabled (IoT) luminaires, particularly in the retail vertical. Management said that demand was soft in December after the price increase, and January was impacted by weather and the government shutdown, but the environment has since improved.
Gross profit margins fell due to a shift in sales among key customers within the retail channel, fewer shipments to large commercial projects, and product substitutions to lower-priced alternatives, primarily for more basic, lesser-featured LED luminaires.
Encouragingly, adjusted operating margins increased for the first time in six quarters. Pressure on gross margins was offset by lower freight and commission costs and productivity improvements.
Acuity expects to continue outperforming the low-single-digit growth expected in the North American lighting market. Price increases will provide a tailwind on the top line for the rest of the year. Management warned that the retail channel/mix could continue to pressure the top and bottom line, offset by lower freight costs, but it also diversifies the business and leverages its brand and supply chain.
All in all, it was encouraging to see that price increases did not pull forward even more demand and that investors are encouraged that operating margins expanded for the first time since late 2017. A warning from German lighting leader Osram (OSAGF) last week kept expectations for Acuity low. Among other recent notable items for the sector, Eaton (ETN) announced last month that it will spin off its lighting business.
With a market value of ~$5.3 bln, the stock trades at ~14.5x EPS and ~9x EV/EBITDA, which is on par with the average residential building products supplier.
- OUR VIEW
- LEARNING CENTER