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Why Is Acuity Brands (AYI) Down 4.6% Since Last Earnings Report?

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A month has gone by since the last earnings report for Acuity Brands (AYI). Shares have lost about 4.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Acuity Brands due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Acuity Brands' Q1 Earnings Miss Estimates, Decline Y/Y

Acuity Brands, Inc. reported lower-than-expected first-quarter fiscal 2020 results. Notably, the company believes that overall market conditions will remain sluggish in the rest of fiscal 2020 due to persistent economic uncertainties stemming from global trade issues and tariffs.

Delving Deeper

In the quarter under review, adjusted earnings came in at $2.13 per share that lagged the Zacks Consensus Estimate of $2.17 by 1.8%. Earnings also declined 8.2% from the year-ago quarter’s reported figure of $2.32. The downside was primarily caused by lower adjusted pretax income, partially offset by a lower effective tax rate as well as average shares outstanding.

Net sales during the quarter totaled $834.7 million, which missed the consensus mark of $881 million by 4.4%. Also, the reported figure declined 10.5% from $932.6 million in the prior-year quarter. The downside was caused by 16% fall in volumes, partially offset by 3% positive impact of price/mix changes and approximately 2.5% contribution from acquisitions.

Operating Highlights

Adjusted gross margin improved 330 basis points (bps) to 42.8% on a year-over-year basis, highest in the last 12 quarters, despite lower volume. The upside can be attributed to favorable sales channel mix and productivity improvements.

Adjusted selling, distribution and administrative or SD&A expenses — contributing 28.5% to net sales — grew 330 bps from the year-ago quarter’s figure. This was caused by increased acquisition-related operating costs. Adjusted operating profit margin came in at 14.3%, down 10 bps year over year.

Financials

As of Nov 30, 2019, Acuity Brands had cash and cash equivalents of $266.6 million compared with $461 million at the end of fiscal 2019. In fiscal first quarter, cash provided by operating activities totaled $129.6 million compared with $131.8 million in the prior-year quarter.
 
Special Charge

During the first quarter of fiscal 2020, the company recorded $6.9 million pre-tax special charge — consisting severance costs and expenses related to consolidation of certain facilities — compared with $1-million charges reported in the year-ago quarter. Notably, these actions are expected to better align with the cost structure and current market demand, allowing continued investment in growth initiatives. Management expects to achieve fiscal 2020 pre-tax savings in excess of the special charge, with most of the benefit occurring in the second half of the fiscal year.

Fiscal 2020 Outlook

Acuity Brands continues to expect sluggish market demand for lighting products as economic issues including global trade policies and the potential for future tariffs remain unresolved.

Nonetheless, the company is cautiously optimistic for fiscal 2020 as the recent Dodge Momentum Index has shown a positive indicator for lighting market in the latter half of 2020.

Moreover, the company expects to outperform the growth rates of the core markets through execution of its previously announced growth strategies, increased margins by selling a richer mix of products and solutions as well as leveraging its fixed cost infrastructure to improve overall profitability.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -7.32% due to these changes.

VGM Scores

Currently, Acuity Brands has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Acuity Brands has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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