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Acuity Brands Benefits From Innovation Amid Soft Demand

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Acuity Brands, Inc.’s (AYI - Free Report) innovative lighting control solutions and energy-efficient luminaries will drive growth. Also, its strategic buyouts and cost-control initiatives bode well.

However, weak demand for luminaries in the United States, inclement weather and higher costs raise concerns.

Recently, the company posted lackluster first-quarter fiscal 2020 results, wherein the top and bottom lines missed the respective Zacks Consensus Estimate, and declined year over year. The downside was caused by 16% fall in volumes and lower adjusted pretax income (Read more: Acuity Brands' Q1 Earnings Miss Estimates, Decline Y/Y)

Shares of this Zacks Rank #3 (Hold) company plummeted more than 14% in the past 13 days, post its earnings release. In fact, in the past three months, the stock has declined 3.6% compared with the industry’s 1.6% fall. Estimates for fiscal 2020 have moved south in the past 30 days, reflecting concerns surrounding the company’s earnings growth potential.



Let’s delve deeper into factors that are likely to aid Acuity Brands.  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Factors Driving Growth

Acuity Brands keeps on diversifying the product portfolio through continuous innovation of energy-efficient luminaries and lighting control solutions. Also, it focuses on expanding geographic borders via acquisitions and joint ventures. In addition to owning an attractive business model, the company is working on smart business strategies to achieve consistent sales and earnings growth.

In fiscal 2019, it introduced almost 100 new product families to its industry-leading portfolio and plans to introduce more than 100 new products in fiscal 2020.  Notably, Acuity Brands’ Atrius-based IoT luminaires and solutions in the retail sector are becoming the industry standard.

Recently, the company acquired two businesses — LocusLabs and The Luminaires Group (“TLG”). LocusLabs is a leading indoor mapping and location platform whose software supports navigation applications used in mobile devices, web browsers or digital displays in airports, event centers, multi-floor buildings and campuses. With the acquisition, Acuity Brands aims to provide venues with an indoor positioning system.

Meanwhile, Canada-based TLG is a leading provider of specification-grade lightening solutions. Acuity Brands, together with TLG’s renowned brands, will provide an extensive customized luminaires solution to customers looking for innovative technology, great design and optimum performance.

The company has undertaken various cost-saving actions that are expected to improve margins. Notably, in first-quarter fiscal 2020, adjusted gross margin increased a significant 330 basis points (bps) year over year, backed by favorable price/mix, lower cost for certain inputs and contribution from the acquisition of TLG.

Headwinds

Current market conditions in the lighting industry continue to create a challenging environment for Acuity Brands, and other companies like LSI Industries Inc. LYTS, Orion Energy Systems, Inc. OESX and Energy Focus, Inc. EFOI. The company remains cautiously optimistic for the rest of fiscal 2020 as economic issues including global trade policies and future tariffs remain unresolved. In fact, the fiscal second quarter traditionally posts lowest sales due to inclement weather during December, January and February months.

Over the past few quarters, it has been witnessing extreme costs involved in regular research and development. Higher spending on research and development, along with higher tariff, shortage of skilled labor, uncertainty related to infrastructure spending, and federal regulatory and trade policies may dent margins and thereby the bottom line.

In addition to these headwinds, it is experiencing higher acquisition and joint venture-related expenses. During first-quarter fiscal 2020, adjusted selling, distribution and administrative or SD&A expenses expanded 330 bps from a year ago.

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