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Acuity Brands' Product Innovation Bodes Well, Costs High

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Acuity Brands, Inc.’s AYI innovative lighting control solutions and energy-efficient luminaries are substantial growth drivers for the company’s overall performance. Recently, the company reported first-quarter fiscal 2019 results, wherein both the top and bottom lines surpassed the Zacks Consensus Estimate by 0.1% and 7.4%, respectively. Also, the reported figure increased 10.7% and 19.6% on year-over-year basis. Its robust performance was backed by higher demand for small and medium-sized lighting solutions.

However, rising freight and material costs, along with higher employee-related expenses hampered its margins. Meanwhile, shares of Acuity Brands, which have outperformed its industry over a year, declined 2.8% following the fiscal first-quarter earnings release in one-day trading session. The company’s cautious outlook perhaps hurt investors’ sentiments.

Let’s delve deeper into the factors that substantiate its Zacks Rank #3 (Hold).

Factors Driving Growth

Product Innovation: Acuity Brands is highly focused on expanding its portfolio of innovative lighting control solutions and energy-efficient luminaries. The company introduces new products and capitalizes on market opportunities in order to drive sales growth.

Notably, in the first quarter of fiscal 2019, net sales improvement of 10.7% was primarily driven by volume growth in its Contractor Select portfolio, Atrius-enabled luminaires and Holophane solutions. Overall, the company witnessed solid growth in most channels and geographies. Sales volume in the fiscal first quarter grew approximately 11% year over year, backed by continued efforts to expand its customer base, along with the introduction of new products and solutions.

Cost-Saving Initiatives: The company has been undertaking various cost-saving initiatives that are expected to offset higher input cost as well as the impact of tariffs. These actions include price increases and reduction in other costs. During the fiscal first quarter, the company announced two price increases in order to offset the negative impact of higher material cost. Adjusted gross profit margin during the fiscal first quarter grew 60 basis points (bps) sequentially. Moreover, the company remains confident about its initiatives to drive long-term growth.

Expansion Via Acquisitions: Acuity Brands is expanding its geographic borders and product portfolio through acquisitions and joint ventures. Acquisitions (net of divestitures) added 1% to its total revenues in the fiscal first quarter.

In fiscal 2018, the company spent $163 million on acquisitions, namely Lucid Design Group and IOTA Engineering. Being an industry leader in emergency lighting and power equipment for commercial and institutional applications, IOTA will enhance its market leadership in this important lighting category.

Causes of Concerns

Rising Costs: Energy-efficient luminaries and innovative lighting control solutions require regular research and development, and hence involve costs. In the fiscal first quarter, the company’s adjusted selling, distribution and administrative expenses (“SD&A”) increased 9.4%. The increase in SD&A expenses was mainly due to higher freight and commission expenses to support greater sales volume, along with increased employee-related and acquisition-related costs. In fact, more than 50% of the increased SDA was due to higher employee-related costs.

Moreover, its adjusted gross margin declined nearly 200 bps and adjusted operating margin contracted 170 bps year over year in the said quarter. The downside was primarily due to higher input cost in electronic and certain oil-based components, along with freight and commodity-related items, particularly steel prices.

Weak Industry Demand: Current market conditions in the lighting industry continue to create a challenging environment for Acuity Brands. In fact, the lighting industry is witnessing weak demand in the North American market over the past few quarters. Management does not expect a meaningful rebound in the demand for luminaries in the near term. Moreover, despite reporting better-than-expected results in the first quarter of fiscal 2019, the company remains “cautiously optimistic for fiscal 2019” as it has been a little apprehensive about the overall growth rate of the construction market in fiscal 2019. Also, continued product substitutions to lower priced alternatives as well as labor shortages in certain markets added to the woes.

Stocks to Consider

Some better-ranked stocks in the Construction sector are Great Lakes Dredge & Dock Corporation GLDD, Gates Industrial Corporation PLC GTES and Lennox International, Inc. LII, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Great Lakes’ earnings in 2018 are expected to increase 111%.

Gates Industrial has an expected earnings growth rate of 44.6% for 2018.

Lennox International has a projected earnings growth rate of 18.9% for 2018.

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