Acuity Brands' Pricing and Productivity Efforts Offset Tariff Impacts in the Second Quarter

Acuity Brands (NYSE: AYI) released fiscal second-quarter 2019 results on Wednesday before the markets opened, and though the company recorded a modest year-over-year top-line advance, it was enough to produce record second-quarter net sales.

Let's sift through the commercial lighting and controls manufacturer's report, highlighting both headline numbers and relevant details for investors. Note that all comparative numbers are presented against the prior-year quarter.

Acuity Brands results: The raw numbers

What happened with Acuity Brands this quarter?

  • The company's revenue increase was due to a 3% volume increase, which was offset by changes in sales channel and product mix. These two factors also negated the effect of recently implemented price increases.
  • Gross margin decreased 110 basis points to 39.1%. Management attributed the dip to "a shift in sales among key customers within the retail channel, as well as changes in sales channel mix." In other words, some of the same factors that crimped sales growth were responsible for lower profitability over the past three months. But in addition, changes in what key customers purchased within Acuity's retail channel also affected its profits.
  • Lower gross margin was offset by efficient control of selling, distribution, and administrative (SD&A) expenses. Management pointed to lower freight and commission costs related to the retail channel sales mix changes as a key factor behind the overhead efficiency. Executives also cited cost containment and productivity initiatives as aiding a more disciplined overhead spend.
  • Because of the reduced SD&A expenditures, operating margin improved by 40 basis points to 11.2%.
  • Net earnings declined primarily from the effect of a tax benefit of $18.2 million recorded in the second quarter of 2018, resulting from U.S. tax legislation. In comparison, the company booked income tax expense of roughly $20 million in the current quarter.

What management had to say

During Acuity's earnings conference call, CEO Vernon Nagel listed the factors that allowed the company to boost operating income despite ongoing cost escalation resulting from import tariffs: "Our results for the second quarter were very solid despite continuing inflationary cost pressures and the impact of tariffs. We implemented several actions to address these cost issues, including price increases and additional productivity improvements."

Nagel also expressed management's confidence in its product innovation efforts, particularly within Acuity's Internet of Things (IoT) commercial building and lighting network platform, known as Atrius: "From a commercial perspective, we continue to accelerate the number of Atrius-enabled deployments and increased active programs with several of our largest U.S.-based retailers. Our Atrius-based IoT luminaires [i.e., a complete electric lighting unit] and solutions are becoming the industry standard in the retail segment."

Looking forward

Acuity doesn't offer quantitative forward guidance. However, in the company's earnings press release, Nagel discussed the general business outlook for the next fiscal quarter. He observed that third-party forecasts project that the company's biggest market, the North American lighting market, will continue to grow in the low single-digit range in fiscal 2019.

Also, despite continuing customer trepidation over the potential for further tariffs, particularly on manufacturing components imported from China, Acuity still enjoys healthy order backlogs with many of its key customers.

Essentially, throughout this period of uncertainty, Acuity plans to continue to nudge sales growth forward through product mix and innovation, while attempting to leverage its fixed and variable costs to further improve operating margin. However, should import tariffs escalate, shareholders shouldn't be surprised if the company initiates further pricing actions to absorb rising costs later this year.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.