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Acuity Brands (AYI) Q3 Earnings Beat, Sales Miss, Stock Down

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Acuity Brands, Inc.’s (AYI - Free Report) shares tumbled 7.9%, after it reported third-quarter fiscal 2019 results. Despite reporting better-than-expected earnings, the company’s sales fell shy of analysts’ expectations.

Adjusted earnings came in at $2.53 per share in the quarter, surpassing the Zacks Consensus Estimate of $2.50 by 1.2% and increasing 6.8% on a year-over-year basis, backed by improved sales, higher price realization and productivity gains, despite continuing inflationary cost pressures and the impact of tariffs.

Notably, adjusted earnings excluded the impact of amortization expense of acquired intangible assets, share-based payment cost, acquisition-related items, special charges for streamlining activities, and excess inventory adjustments related to the closure of a facility.

Sales

Net sales during the fiscal third quarter came in at $947.6 million, missing the consensus mark of $970 million by 2.3%. However, the reported figure increased 0.4% year over year. The upside was attributed to more than 1% increase in sales volume, partly offset by unfavorable impact from changes in foreign exchange rates and the adoption of ASC 606. Meanwhile, contribution from acquisitions (net of divestitures) remained flat year over year in the quarter. Again, impact from product price/mix changes was flat year over year as higher pricing was offset by changes in the mix of products sold and customer mix within certain channels.

 

Acuity Brands Inc Price, Consensus and EPS Surprise

Operating Highlights

Adjusted gross profit margin declined 110 basis points (bps) to 40.5% on a year-over-year basis. Yet, third-quarter adjusted gross margin exceeded the 40% mark for the first time in a year and improved sequentially for the third quarter in a row. Higher sales and realized price, and benefits from productivity improvements were offset by a shift in key customers, changes in sales channel mix and increased input costs.

Adjusted selling, distribution and administrative or SD&A expenses — constituting 26.2% of net sales — improved 90 bps from the year-ago quarter. The upside was attributable to a decrease in freight and commission expense.

Adjusted operating margin came in at 14.3%, down 20 bps year over year.

Financials

Cash and cash equivalents, as of May 31, 2019, were $333.7 million compared with $129.1 million at the end of fiscal 2018.

Net cash provided by operating activities was $312 million in the first nine months of fiscal 2019 compared with $299.7 million a year ago.

Outlook

Despite reporting better-than-expected earnings in the fiscal third quarter, the company remains cautiously optimistic for the rest of fiscal 2019. Third-party forecasts and leading indicators continue to suggest that the North American lighting market is projected to increase in low-single digits during 2019.

Acuity Brands remains optimistic about the potentiality of the lighting and lighting-related industry.

Also, it remains confident of the previously announced growth strategies that continue to improve products and solutions mix, while leveraging the fixed cost infrastructure in order to achieve its pre-determined target of achieving higher margins and overall profitability.

Shift in sales among key customers within the retail channel is expected to continue having a dampening effect on gross profit and margins. Nonetheless, it expects the impact from the same to be largely offset by lower freight and commission costs, included in SD&A expenses. In order to boost margin, the company initiated a review of a small portion of its product portfolio and services offering, and aims to eliminate items that do not meet its return objectives.

Meanwhile, Acuity Brands expects fiscal fourth-quarter net sales to be down modestly from the year-ago period, when the company was benefited by significant initial stocking of products in stores of a new customer in the retail sales channel.

Also, the company expects fourth-quarter net sales to be negatively impacted by its efforts to boost margin profile. The company has been focusing on programs for reviewing portions of its product portfolio and service offerings, with the objective of eliminating those items and activities that do not meet its return objectives. The company believes fourth-quarter adjusted operating profit margin to exceed from the prior-year level and improve on a sequential basis.

Zacks Rank & Other Key Picks

Currently, Acuity Brands carries a Zacks Rank #2 (Buy). Other top-ranked stocks in the Construction sector include Quanta Services, Inc. (PWR - Free Report) , Jacobs Engineering Group Inc. (JEC - Free Report) and KBR, Inc. (KBR - Free Report) , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Quanta Services’ earnings for the current year are expected to increase 29.5%.

Jacobs has a three-five year expected EPS growth rate of 12%.

KBR surpassed earnings estimates in all the trailing four quarters, with the average being 8.9%.

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