Acuity Sales Down 12% C&I Down Less. Outlook Weak.

Earlier this week Acuity released, from a headline viewpoint, horrid Q4 sales performance.  Sales declined almost 12% from prior year.  Much of the decline is attributed to the retail segment, however, sources described Acuity’s distribution business as “flat / low single digits”, which is a slight under performance from manufacturer reported performance in our Pulse of Lighting Report and worse than overall distribution and rep-reported performance.

Earnings Call

According to Acuity’s earning call, which covers their Q4 as well as their fiscal year:

• “Solid fourth quarter (summertime) given market conditions” (definition of “solid” in a down quarter is a interesting description)
• “2019 was one of the most challenging years experienced at Acuity with inflationary pressures, tariffs, uncertainty by trade actions and labor shortages in key markets all contributing to tempering demand for lighting products.” (and, realistically, the labor shortages will be a long-term issue.)
• Have trimmed product offering to reduce low margin SKUs, especially SKUs sold in the retail channel.
• Q4 sales down almost 12% and for the full fiscal year sales were flat at $3.7 billion with operating profit essentially flat also.
  • Net sales declined 16% but had 5% favorable benefit from price increases for a net decline of 11.6%
  • Low shipments in retail channel were 50%+ of total decline vs prior year due to load-ins last year.
  • Remaining decline due to reduction in SKUs in low margin items, typically imported items that were impacted by tariffs
    • With Acuity’s focus on reducing low margin SKUs to the retail channel, it is presumed that their overall business mix is trending away from retail.  It may also be that retail is either sourcing directly from China / elsewhere or actively moving business from Acuity to lower cost alternatives.  The retail markets focus on price is unfortunate given the perceptual impact that this has on the remainder of the market.
  • Net sales through independent sales network (reps) was down 4% (a 6% swing from our Pulse of Lighting report!) due to pull forward into prior quarter and weak demand for large projects (which is also a reason for overall industry lighting slowdown)
  • Believe gained some share in lighting controls (may be market specific, but Lutron is still the leader)
  • Had success with building management solution platform, Distech, albeit still a small percent of sales.
  • Net sales in Corporate Accounts Channel, direct sales, was down 20% due to completion of projects (and, evidently lack of backfilling with new sales.  This segment of the business will probably have wide swings until there are consistently multiple of projects being won regularly.)
  • Tier 3 and 4 solutions are now 20% of sales (and this includes controls)
  • Only “several” large retailers’ wit Atrius SaaS applications (after much investment and promise)
    • Starting to see some using the data these systems can generate.
  • Contractor Select now represents 10% of sales ($370 million)

2020 Outlook

• Current market demand is sluggish due to concerns over economic issues (global trade and tariffs)
• Expect conditions “for the foreseeable future”
• Expect
  • Continued product substitution to lower price alternatives (from competition)
  • Labor shortages for electricians
  • Cost increases for components, freight and wages
• 2020 Acuity focus:
  • Growth through market share gains
  • Margin improvement
• Achieve through
• Leverage access to market based upon new products and tiered solutiosn
• Plan to introduce 100 new product families in 2020 (same as 2019), many with embedded controls
• Focus on architectural brands (hence why Luminaires Group acquisition, hence project business)
• Accelerate expansion of connected lighting Atrius IoT in retail, transportation, healthcare, warehousing, distribution and commercial office.  Adding resources to focus on these verticals (and hopefully providing sales process training to distributors and lighting agents, who opt-in, who can accelerate this process locally to “lower tier” prospective customers) otherwise sounds like they will be going direct.
• Accelerate efforts to capture market share for discretionary business
• Build on success of Contractor Select
• Expect FY Q1 (Q4 2019) to also be down due to comparisons that involved tariffs and pre-buying (something that would, theoretically, affect most lighting manufacturers.) Expect mid to high single digit decline (5-9%)
• Expect positive growth, overall, in 2020

Analyst questions

• Talk re retail “load-in” and the inability to determine the impact on the business for year-over-year comparable.  (Perhaps the load-in number should be excluded, determine current (expected) ongoing inventory to get a better handle on the impact? Otherwise sounds like continued excuses.)
• Much discussion regarding Acuity’s margin improvement in 2019 and expectations to continue to enhance in 2020.
• Analyst question “If tariff were to ease, will import competition pick back up and start to pressure margins again?” (Acuity did not comment on this. Expectation by many we speak with is that pricing will drop, first due to tariffs and second due to companies that are primarily import seeking to capture share / increase sales.) Acuity doesn’t expect to see any profit profile change if tariffs are removed as they have instituted price increases that they think will protect them.
  • Acuity expects that if tariffs are removed that projects that are being held due to tariffs will be released, which will spur the market.
• Acuity commented that channel mix was a driver of margin improvement (distribution more profitable than retail.)
• Acuity believes the market has been -1.5 to -4 points, from a sales perspective, for the last seven / eight quarters, hence Acuity outperforms, especially in the C&I market.
• Target (retail store) project has been completed.  Some other retail accounts but not moving as quickly and not as large.
• Headcount is down 9% on year over year basis

Takeaways

• “Sluggish” C&I market with comparable sales outlook for 2020
• C&I market more profitable than retail with Acuity focusing more on this market in 2020 from a mix viewpoint.
• Contractor Select about 10% of company sales
• Gaining some traction in controls, albeit part of projects.
• Atrius IoT adoption “lumpy” and company now expanding its sales outreach beyond the retail segment and hopefully will have quicker adoption.

In the end, not “horrid” results, just, from a sales side, “sluggish”. How’s your lighting business? Distributors, how is Acuity performing for you … what do they need to do better to increase sales?