Acuity Outperforms in Distribution in Q2 (their Q3)
Last week Acuity shared their fiscal Q3 earnings report (Q2 performance). Overall, their lighting performance correlated with our 2020 Q2 Pulse of Lighting report and they outperformed in their “independent” (electrical distribution) channel. They will probably do good this summer given the construction industry is rebounding but there is uncertainty for calendar year Q4 with the possibility of an industry wildcard / windfall that could benefit Acuity, the industry and many others.
What Acuity said to Wall Street and the analysts
In reviewing Acuity’s earnings call, they shared the following:
- Lower revenue (declined 18%) but expanded gross margins (170 basis points)
- Had some supply chain issues in factories due to COVID-19
- Net sales of $776 million
- 20% decrease in volume with 2% increase due to acquisitions to net -18%.
- Independent sales network is 75% of total net sales. Down about 10% vs 2019
- Sales of ContractorSelect increased 7%. In our Pulse of Lighting report, distributor participants shared that they increased inventory commitments to conglomerates, hence Acuity was a beneficiary.
- Direct sales were down 31% due to weakness in large projects, possibly due to project delays (this will be determined if future quarters have increases.)
- Decline in retail of 18% due to continued retrenchment from certain products and this is expected to be a drag on this channel, and the company for “several more quarters.”
- Corporate accounts were down 59% (another version of direct sales) due to retail customers. (And given the state of retail due to COVID-19, it will be interesting to see if / when this will recover. When can Target afford to close / inhibit store activity due to renovations? Will retail closures hurt other Acuity clients?)
- Gross margin was up 170 basis points to 42.2%. (And it’s interesting that its largest market (distribution) is the only one that is up (10%) and margins are up so much. Could it mean that electrical distribution represents the company’s highest gross margins even with its inefficiencies and rebates?)
- The company has plenty of cash, cash equivalent and borrowing availability to make acquisitions if the opportunity presents itself.
- Highlighted a number of COVID-19 related customer success stories where they quickly deployed lighting solutions inclusive of some interesting technical solutions relating to indoor positioning, heat mapping technology and smart lighting.
- Have seen sales improvement in industrial and educational sectors and “challenges” in retail and commercial office verticals. (This may occur for an extended time and could also extend to the hotel industry.)
- Note, if the reshoring of manufacturing occurs, Acuity’s Holophane line could be a beneficiary.
- Beginning a “digital transformation” process and hired a CTO and are “reimagining” business processes. (This can also infer that those distributors who can match up with Acuity’s digital processes may gain “preference” with Acuity.)
- Key metrics will be customer satisfaction and timeliness.
- Great uncertainty around demand (which distributors, manufacturers and reps corroborated in our Q2 Pulse of Lighting report.)
- Expect continued pricing pressures.
- Expects increased pricing pressures on upcoming projects being quoted. (While Acuity mentions that price will be used for taking share, in reality it may be used to support cash flow for operations – essentially “buying business” at the distributor AND the manufacturer level.)
- An analyst asked about types of projects in agent quotation / business development phases (i.e. future business opportunities). Acuity responded that it is geographically inconsistent and that highlighted opportunities in education, industrial, logistics centers and warehouses. Acuity also commented that “more and more people are ordering products online” which infers they are selling to / through those who are selling online (DIY, electrical distributors, online retailers / B2B sites). Also mentioned that agents are talking to retailers about UV-C lighting opportunities. And they see good “stock and flow” from distributors.
The Wildcard / Windfall – UV-C Lighting
The wildcard for growth during COVID-19 could be UV-C lighting. Acuity made a deal with Ushio to use their UV-C lighting. Signify made their announcement about testing its UV-C lighting offering at BU’s facilities and its India group announced plans for an extensive offering. Others are also selling UV-C lighting. The challenge is:
Will the product category become commoditized with margin being eroded?
But we see lots of questions:
- Will there be demand to justify the reported potential?
- Will there be a company that excels in demand generation and become known for UV-C lighting?
- Couldthe industry band together to market and create demand? Lighting companies are good in working their traditional “go to market” strategy and being responsive to lighting agents and specifier requests – hence reactive – but are not the greatest at building demand quickly (see their “success” in PoE, “smart lighting” and their lighting controls efforts). More is needed to reach the renovation opportunity to increase awareness. Perhaps an industry initiative is needed?
- Or will Signify, as an illumination / lighting company, out-market, and perhaps be a more trusted, solution for illumination and the technology, than luminaire suppliers (Acuity and other fixture manufacturers)?
Time will tell. As it is also possible that UV-C is not effectively marketed and/or deployed.
Looking Forward
Overall, from an electrical distribution viewpoint, Acuity did well and probably increased its market share in a tough market. The reopening of construction and the broader economy will help. They question is “what will the project market look like the end of the year … especially the new construction market … given that Acuity’s strength is large projects.” A good quarter with an uncertain six to nine month future but the short-term should be good.