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Acuity Brands Gains on Innovation, Higher Costs Hurt

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Acuity Brands, Inc.’s (AYI - Free Report) innovative lighting control solutions and energy-efficient luminaries are substantial growth drivers. However, higher material costs, along with research and development expenses might hamper its margins.

Key Growth Drivers

Product Innovation: Acuity Brands is continually expanding its portfolio of innovative lighting control solutions and energy-efficient luminaries to drive growth. The company continues to introduce new products and capitalize on market opportunities. The LED segment is the fastest-growing segment at present. Sales of LED-based luminaires during the first three quarters of fiscal 2018 accounted for approximately two-thirds of the total net sales. This reflects significant penetration of LEDs in the lighting market.

Expansion: Acuity Brands is expanding its geographic borders and product portfolio through acquisitions and joint ventures, and has spent $164 million as of May 31, 2018 for the same. In the third quarter, the company completed the acquisition of IOTA, which will enhance its market leadership in this important lighting category.

Share Buyback Programs: Acuity Brands repurchased $298 million as of May 31, 2018 and has 5.2 million shares remaining under its current share repurchase authorization. Share repurchases drive the company’s earnings per share, book value as well as shareholder equity as it reduces the number of shares outstanding. Thus, buyback programs boost investors’ confidence in a stock. Acuity Brands’ strong capital position is reflected in its regular share repurchases.

Concerns

Rising Costs: Energy-efficient luminaries and innovative lighting control solutions require regular research and development, and hence involve costs. In the third quarter, adjusted operating margin was down 220 basis points year over year. Moreover, increasing material and labor costs are also hampering its margins. A shortage of skilled labor may limit production. Again, commodity costs, especially steel prices, are increasing owing to the recently enacted tariffs.

Softness in the Lighting Industry: Current market conditions in the lighting industry continue to create a challenging environment for Acuity Brands and other companies like Energy Focus, Inc. (EFOI - Free Report) , LSI Industries Inc. (LYTS - Free Report) , and Orion Energy Systems, Inc (OESX - Free Report) . Although overall growth rate of the U.S. lighting market improved slightly in the fiscal third quarter compared with the previous three quarters, it was still down low single digits year over year.

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