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Snap-on Lags Industry Mark: Soft Tools Group Unit to Blame?

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Shares of Snap-on Incorporated SNA have gained 5.2% in the past three months compared with the industry’s 8.3% rise. We note that persistent softness in the company’s Tools Group division has been exerting pressure on overall sales. Evidently, Snap-on’s top line lagged the Zacks Consensus Estimate for five straight quarters.

We note that sales at Tools Group dropped 1.2% year over year in third-quarter 2019, following a decline of 1.5% in the second quarter. Continued turmoil in the company’s international geographies — Europe and the U.K. in particular — has been dragging the segment’s sales. Higher complexity in vehicles is a further concern for the division.

In the third quarter, sales in the segment were mainly hurt by a decline in organic sales and adverse impact of foreign currency translations. Organic sales were impacted by lower sales in the segment’s international business, partly negated by sales growth in the United States. Moreover, the segment’s gross margin fell 20 basis points (bps) and operating margin plunged 140 bps.

Higher cost of investments for the segment’s in-field support and training, which is likely to enable powerful and new products, are increasing costs. Consequently, these costs are exerting pressure on the company’s operating margins.

 

 

Again, concerns regarding adverse foreign currency fluctuations, stiff competition and volatility in raw material prices cannot be ignored.

Strategies to Drive Performance

Snap-on has been undertaking strategic actions to boost growth across its business. In this regard, the company’s Rapid Continuous Improvement (RCI) program — designed to enhance organizational effectiveness and efficiency as well as generate savings and boost margins — is noteworthy.

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

Despite challenges in geographies, management expects to deliver coherent growth and leverage capabilities in the automotive repair business. It also expects to develop and expand its professional customer base in the automotive repair business and adjacent industries, additional geographies as well as other areas like critical industries.

We expect the aforesaid initiatives like RCI program and other actions to aid Snap-on’s performance, which will enable the Zacks Rank #3 (Hold) stock to revive its lost sheen.

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