Stanley Black & Decker, Inc. (SWK) Q2 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call presents a mixed picture: while there are strong cash flow and future margin improvements, current revenue and margin declines due to tariffs and shipment disruptions are concerning. The Q&A highlights management's cautious tone and uncertainty in guidance, especially regarding tariffs. Despite some optimism in certain segments and planned price increases, the lack of clear guidance and current performance issues suggest a neutral market reaction in the short term.

Key Financial Performance

Revenue $3.9 billion, down 2% year-over-year and down 3% organically. The decline was attributed to a slow outdoor buying season and shipment disruptions related to tariffs.

Adjusted Gross Margin Rate 27.5%, down from the previous year due to a 3-point gross margin impact from tariffs and lower volume. This was partially offset by supply chain transformation efficiencies and initial price actions.

Adjusted EBITDA Margin 8.1%, down 260 basis points year-over-year, reflecting gross margin changes and growth investments, partially offset by cost control measures.

Adjusted Earnings Per Share $1.08, inclusive of a discrete tax benefit.

Free Cash Flow $135 million, a strong result considering the operational impact of new trade policies.

Tools & Outdoor Revenue Approximately $3.5 billion, representing a 2% decline year-over-year. Organic revenue decreased by 3%, with a 2% price realization and a 5% volume decline due to a slow outdoor buying season and tariff-related shipment disruptions.

Power Tools Organic Revenue Growth 1%, driven by price, resilient professional demand, and solid performance in key investment markets.

Hand Tools Organic Revenue Decline 5%, primarily due to tariff-related shipment disruptions in North America.

Outdoor Organic Revenue Decline 7%, related to a slow buying season.

Engineered Fastening Revenue Down 2% year-over-year and 1% organically. Automotive business experienced a mid-single-digit organic decline due to reduced production schedules and restrained capital expenditures by OEMs. Aerospace business achieved over 20% organic growth.

Engineered Fastening Adjusted Segment Margin Rate 10.8%, a decline from the previous year due to softness in higher-margin automotive fasteners.

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Operating Highlights

DEWALT professional products: Continued top line expansion with over 2 years of consistent growth across all product lines and regions. New MSUITE Hangers automation tool introduced, enhancing productivity for contractors.

Regional performance: North America saw a 4% organic revenue decline, Europe declined by 1%, and the Rest of World grew by 1%, driven by Latin America, Australia, New Zealand, and the Middle East.

Supply chain transformation: Achieved $1.8 billion in cost savings since inception, with $150 million in Q2 2025. Targeting $2 billion in total savings by year-end 2025.

Tariff mitigation: Implemented supply chain adjustments and pricing strategies to address $800 million annualized gross tariff costs. Reduced Chinese production for the U.S. to less than 5% by 2026.

Leadership transition: Chris Nelson to become CEO on October 1, 2025, with Don Allan transitioning to Executive Chair role.

Portfolio streamlining: Divested $2.6 billion in revenue to focus on core strengths in Tools & Outdoor and Engineered Fastening.

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Risk or Challenges

Tariff-related shipment disruptions: The company faced nontypical shipment disruptions due to customer reactions to tariffs, impacting revenue and gross margins. Tariffs have also led to a 3-point gross margin impact and lower volume.

Slow outdoor buying season: A slow outdoor buying season contributed to a 2% decline in revenue and a 5% drop in volume for the Tools & Outdoor segment.

Supply chain challenges: The company is in the final stages of a multiyear supply chain transformation, which is critical to optimizing cost structure and mitigating tariff impacts. However, the transformation is not yet complete, posing risks to operational efficiency.

Economic and market volatility: Market volatility and dynamic operating environments, including tariff-related disruptions and subdued consumer DIY demand, have created challenges for revenue and margin stability.

Dependence on tariff mitigation strategies: The company’s financial performance heavily relies on the successful implementation of tariff mitigation strategies, including supply chain adjustments and pricing actions. Failure to execute these strategies could significantly impact margins and profitability.

Rare earth supply constraints: The company anticipates increased expenses to manage rare earth supply constraints, which could impact costs and operational efficiency.

Automotive fasteners business decline: The automotive fasteners business experienced a mid-single-digit organic decline due to reduced production schedules and restrained capital expenditures by OEMs, impacting the Engineered Fastening segment.

DIY market softness: Continued softness in the DIY market has contributed to volume pressures and revenue declines.

Currency fluctuations: Currency fluctuations have impacted revenue, with a 2% currency favorability offset by other volume declines in the Engineered Fastening segment.

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Guidance & Outlook

Revenue Expectations: The company anticipates 2025 total company sales to retract slightly compared to 2024, with year-over-year organic revenue expected to remain flat. Back half organic revenue is planned to be relatively flat, consistent with the first half performance.

Margin Projections: The company aims to achieve an adjusted gross margin of 35% or higher in the long term. Back half adjusted gross margin is expected to expand year-over-year, with stronger performance in the fourth quarter. Full-year adjusted EBITDA margins are projected to expand year-over-year.

Capital Expenditures and Cash Flow: The company targets approximately $600 million in free cash flow for 2025, supported by disciplined inventory management and expenditure controls. Excess free cash flow will be used for debt repayment, with a goal of achieving less than or equal to 2.5x net debt to adjusted EBITDA.

Market Trends and Business Segment Performance: The Tools & Outdoor segment is projected to decline by approximately 1% in organic revenue, while the Engineered Fastening segment is anticipated to achieve 1% organic growth, driven by sustained momentum in aerospace. The company expects relatively strong professional demand but continued softness in the DIY and outdoor product lines.

Supply Chain and Tariff Mitigation: The company plans to reduce Chinese production for the U.S. to less than 5% by the end of 2026. Tariff mitigation strategies include supply chain adjustments, targeted pricing measures, and customer collaboration. A second price increase is planned for early Q4 2025.

Deleveraging Goals: The company aims to achieve its deleveraging goal in 2026 through additional modest streamlining of the existing business portfolio and using proceeds from portfolio pruning for debt repayment.

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Shareholder Return Plan

Dividend Funding: Cash generation will be utilized to fund our dividend with the remainder intended to be used for debt repayment.

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Key Q&A

Q:What is the gross margin outlook for Q4 and next year?

A:The gross margin for Q4 is expected to be in the 33% to 34% range, with year-over-year expansion of 1.5 to 2 percentage points. For next year, the company aims to maintain a 35% gross margin journey, with the back half of the year expected to be in the mid-30s and approaching 35% by year-end. Tariffs have caused a 9- to 12-month delay in reaching the 35% target.

Q:What are the reasons for the Q2 upside not fully translating to the full-year guidance?

A:The Q2 upside was primarily due to $0.15 operational improvements and tax timing benefits. Operationally, $0.10 came from lower tariff expenses due to FIFO/LIFO timing, which balances out later in the year. The remaining upside was offset by mitigation expenses and updated tariff expenditure estimates.

Q:How are pricing increases tracking versus expectations, and what is the outlook for the second half?

A:Pricing increases have been realized as expected, with no significant changes in demand patterns or competitive dynamics. The second round of price increases, planned for Q4, will be more modest, about half of the first round. The company expects high single-digit price increases in the tools segment for the back half of the year, offset by volume declines.

Q:What is the status of customer buying patterns and inventory levels?

A:Inventory levels are healthy and in line with historical norms. There is no significant destocking expected. Temporary disruptions in Q2 were due to changes in promotional plans related to trade policy adjustments.

Q:What is the impact of tariffs and the company's mitigation plans?

A:The current annualized tariff expense run rate is $800 million, up from $600 million earlier in the year. The increase is due to higher China tariffs and changes in tariffs for other countries. The company plans to offset these costs through mitigation and pricing actions, aiming to reduce China exposure to 5% or less by the end of next year.

Q:What are the trends in the outdoor and DIY segments?

A:The outdoor segment had a late start due to wet weather but is now seeing robust POS activity. The market is expected to be flat to slightly down for the year. In the DIY segment, the CRAFTSMAN brand is performing in line with market trends, which have been affected by interest rate sensitivity. The company plans to expand the CRAFTSMAN product assortment to drive growth.

Q:What is the outlook for the CRAFTSMAN brand?

A:The CRAFTSMAN brand is performing in line with the market, which has been impacted by interest rate sensitivity. The company plans to expand the product assortment, particularly in power tools, to drive organic growth and capitalize on market recovery.

Q:Review of Unclear Management Responses

A:Management avoided providing specific quarter-by-quarter guidance for next year, citing uncertainties related to tariffs and FIFO/LIFO dynamics. They also used vague language when discussing the timing and impact of mitigation plans and pricing actions, particularly for the front half of next year.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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The earnings call revealed mixed performance: positive growth in Engineered Fastening and aerospace, but declines in Tools & Outdoor and overall revenue. Management's optimistic guidance and strategic plans for margin improvement and cost reductions are offset by flat revenue expectations and unclear responses about future guidance. The Q&A highlighted stable volume expectations and strategic tariff mitigation, but concerns remain about consumer confidence and housing policy impacts. Without market cap data, predicting volatility is challenging, but the balanced positives and negatives suggest a neutral stock price movement.

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