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Snap-On to Gain From RCI Strategy, Volatile Currency a Worry

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Snap-On Incorporated’s (SNA - Free Report) robust business model and focus on value-creation processes are likely to keep driving the company’s performance. Additionally, the company’s RCI program, buyouts and solid innovations bode well. However, soft sales surprise trend and currency headwinds are deterrents.

Let’s delve deeper.

A Brief Introspection

Snap-On’s robust business model helps it enhance value-creation processes, which focus on safety, quality of service, customer satisfaction and innovation. In fact, the company’s growth strategy focuses on three critical areas — enhancing the franchise network, improving relationship with repair shop owners and managers as well as expanding critical industries in emerging markets.

Moreover, the company is progressing with its strategies like Rapid Continuous Improvement (RCI). The RCI process focuses on enhancing organizational effectiveness and minimizing costs. The process also helps Snap-on to boost sales and margins as well as generate savings. The program has helped drive productivity and process improvement plans. 

Notably, management intends to boost customer services as well as enhance manufacturing and supply chain capabilities through the RCI initiatives and further investments. Savings from RCI initiatives was the primary driver for gross margin in the second quarter. 

The Repair Systems & Information Group segment, which remained sluggish in the last few quarters, recently bounced back. Notably, the segment witnessed sales growth of 1.7% in second-quarter 2019. Organic sales in the segment improved 3.5%, owing to increased sales to original equipment manufacturer (OEM) dealerships.

Apart from these, the company recently acquired Cognitran Limited — a market leader in after sales solutions — which will be part of the Repair Systems & Information Group segment. The buyout is expected to reinforce Snap-on’s capabilities and provide solutions through integrated upstream services to OEM clients. 

Headwinds to Overcome

Snap-On, which shares space with Toro Company (TTC - Free Report) , Terex Corporation (TEX - Free Report) and Titan International (TWI - Free Report) , is witnessing soft sales surprise trend that persisted in second-quarter 2019. Notably, the metric missed estimates for the fifth straight time in the said quarter. Moreover, sales dropped 0.3% in the second quarter due to adverse impacts of foreign-currency translations, partly offset by organic sales growth and contributions from acquisitions. Decline in sales across the Commercial & Industrial Group segment hurt the company’s top line 

Notably, unfavorable currency movements are a deterrent. In this regard, the company’s top line in second-quarter 2019 included negative impacts from unfavorable foreign currency of around $19.5 million. Further, unfavorable currency hurt operating income by nearly $5.9 million. In fact, currency had a negative impact of $10.1 million, $5.1 million and $5.9 million at the company’s Commercial & Industrial Group, Tools Group and Repair Systems & Information Group segments in the reported quarter, respectively.  Though management expects currency translations to improve in the third quarter, the magnitude of impacts on quarterly results is yet to be seen.

All said, we expect the company’s strategic initiatives to help it overcome these headwinds in the near term. 

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