Acuity Down 5%; Competing Strategically on Price

Last week Acuity shared its Q4 performance, which also coincided with the end of their fiscal year.  While the headline number was a decrease of only 5%, that’s an aggregate. Looking at the details is of greater interest to those in the channel and to understanding performance.

Highlights from the call (commentary in parentheses)

According to Acuity:

• Net sales were $891 million, down 5% versus last year
  • Estimate that it was -4% on volume and -4% on price and mix
  • Acquisitions generated a 3% increase
  • Independent sales network (distribution), which is 72% of sales, was “flat” but then Acuity said, “sales from this channel declined 4% as compared to prior year” excluding acquisitions (so, acquisitions benefited the channel.  It should be noted that our Q3 Pulse of Lighting report projected a price decline as well as a manufacturer sales decline.)
  • Direct sales network was down 12%.
  • Corporate accounts channel was down 29%
  • Retail channel was up 7% to $57 million in the quarter (so, retail was only 6.4% of the business. The increase isn’t surprising as we’ve heard other manufacturers tell us that they have seen appropriate pro products / packaging sales at big boxes increase during the pandemic. This is probably ContractorSelect type product … resi-oriented products.)
  • Gross profit was down $20M, however, gross profit margin was steady at 42.1%
  • Currently have cash / cash equivalents of $561M after investing $303M in acquisitions during the year and providing $90M to shareholders via stock buybacks and dividends (so, Acuity has money to invest into building the business / taking share and/or making an acquisition if one was relevant.)
  • ContractorSelect offering was up 11% via home centers and in responding to “discretionary” opportunities (with retail up 7%, perhaps most of this was retail?)
• “Executing on a transformation of the business”
  • “Becoming better, smarter, faster, to transform service levels” (distributors, are you experiencing an improvement?)
    • Shorter lead times
    • Allowing contractors, distributors and agencies to know status of orders in realtime (this could help project management departments and, if accurate, distributors could integrate into their websites to allow contractors to see the status of their order, back to the factory! For large projects in different product categories (i.e. switchgear, wire, etc) this could be a significant benefit to distributors and contractors. The integration will be interesting (and the accuracy.)
  • “Made the decision to be aggressive in the marketplace … strategic investments in price.” (so, competing on price in “selected” markets presumably on selected projects and with selected products. The question, from a distributor viewpoint, becomes “are they making that decision and supporting all distributors in that market or how are they determining which distributor(s) to support … or is the rep making that decision? Is Acuity picking the “winners and losers” for the business?” Will national chains start looking at what they are paying, per SKU, across their platform and wanting SPAs or the best price, or regional prices? This is a new environment for a major lighting line as they seek to “meet the competition” – smaller manufacturers who have historically been more price competitive. And, as an aside, as price decreases, distributor gross margin dollars decrease as value-engineering becomes more challenging. Wonder how this is impacting lighting agent overage?)
• Expanding UVC germicidal offering (and announced a new partnership with Puro Lighting, which could significantly benefit Puro.)
• Spent $70 million on stock repurchase (while part of their plan, and makes shareholders happy – an remember, most are institutions, it makes one wonder what the money could have been used for to advance the business and support the channel – sales support to take share? Further digitalization initiatives? Supply chain issues? Etc.…???)
• No insights were given re 2021 just “expect more of the same”.

Analyst questions

• Saw strengths in the residential market through home centers and the ContractorSelect offering for discretionary business. Also saw some strength in infrastructure and industrial segments.
• Highest degree of uncertainty that Ricky Reece, President of Acuity Lighting, has seen in his 15 years in the industry. Tough to forecast where the market is going. Business is uneven by geography and by vertical. Seeing some good activity in warehouse and logistic areas. Seeing activity via online sales, especially for outdoor and had some success in the educational market.
• Goal is to manage the business to a 41-42% gross margin. Expect targeted pricing actions to continue to drive sales strategically. (and I would suspect that competitors will identify where Acuity is targeting and will respond accordingly, either with the same distributor, their key distributor or with blanket price discounting in a market as the battle for share will continue. Manufacturers will want to gather data and evaluate analytics quickly to respond. POS data will help as will quote feedback.)
• Believe that smaller projects are being delayed, could be cancelled. Hasn’t seen much delay / cancellation in large projects as these had already had “ground broken” and lighting is one of the final phases.
• Acuity projects that the lighting market is 50% renovation and 50% new construction (distributors, do you feel this is accurate for your business / your market? Our suspicion is that the market is more renovation given that there are more manufacturers who essentially only focus on the renovation business. For the market to be 50/50, Acuity and other large manufacturers would need to balance the difference.)
  • Over the past few years, Acuity has participated in more renovation business than it historically has.
  • Expects slowness in new construction in 2021
  • Thinks resi could be an opportunity (only challenge with this is that resi is historically a small percentage of the overall electrical industry sales. Also, Acuity feels they could increase in the home channel market … but it’s only 6.4% of sales. So, if it grows to 10%, not a huge sales change.)
• While Acuity had a 4% decline from price, over the past year, they had had a 4% increase so, net over the year is zero.
• Acuity believes a key differentiating factor is their investment in their controls technologies.

So, the questions are:

• How is Acuity performing for you?
• If you’ve been a beneficiary of Acuity’s strategic pricing initiative, has it helped you win significant business or is it project specific and something that was probably destined for them to win anyways?
• How are other manufacturers responding to the pricing initiatives? How are they performing in the market?