Prepare to Pay More for Electric Drills and Power Saws
(Bloomberg Opinion) -- Power tools are about to get a lot more expensive in the U.S.
Stanley Black & Decker Inc., which makes drills, saws and lawn mowers, already raised global prices 4% to 5% in the third quarter to try to keep up with runaway commodity and shipping costs. But the company, which reported earnings for the period on Thursday, said that it now expects to spend an extra $690 million this year on raw materials and logistics services, a substantial step up from an estimate of $460 million in July. Spot pricing for shipping containers is as much as seven times higher than what Stanley was paying earlier this year, and the average time required to ferry goods from Asian suppliers to North American facilities has stretched to 85 days from 40 in more normal times. Stanley is paying up for premium freight options to speed delivery of high-priority components and satisfy a surge in demand for home-improvement products, which is still going strong even as pandemic restrictions fade. It’s also stockpiling inventory, to the detriment of its free cash flow, which swung to the negative in the quarter.
“To be clear, we have made a conscious decision to incur temporarily higher expediting costs to serve our customers and meet demand as effectively as possible,” Chief Executive Officer Jim Loree said on a call to discuss the results. But that’s not a sustainable dynamic. So Stanley is targeting another round of global price increases in the ballpark of 4% to 5% in the final stretch of the year. Within that, effective Nov. 8, it’s planning to slap a 5% surcharge on North American tool and storage products to reflect the extraordinary spike in the cost required to make and deliver them. While Stanley has used surcharges in certain product categories in the past, it’s never done so on this scale before, Lee McChesney, the company’s vice president of corporate finance and chief financial officer of its tools division, said in a phone interview. Depending on how the supply-chain and inflationary environment evolves, Stanley said it might look at additional price increases in the first quarter.
There’s little sign of sticker shock yet, and conversations with customers about the surcharge are “leaning in the right direction,” McChesney said. The company slightly lowered its revenue guidance for the full year amid the supply-chain pressures but still expects as much as 17% growth after backing out the impact of acquisitions and currency swings.
That’s still a lot of price increases. But the benefit of surcharges is that they are temporary. Stanley’s decision to lean on this pricing lever indicates that it doesn’t expect the current supply-chain crunch to last forever and that it thinks the consumer is healthy enough to afford higher bills in the short term. To that end, the company said U.S. retail point-of-sales data indicate mid-single-digit growth over the past four weeks, with the most recent week up double digits. Stanley executives also commented that the supply-chain stress appears to have stabilized in the last 30 to 45 days. Semiconductors have been a particular pain point, but Stanley is on track to secure enough chips and battery cells to support a 25% increase in power tool manufacturing by the spring of next year, should demand support such an expansion. A peak in congested shipping lanes and shortages doesn’t mean the problems are fixed, nor that a normal operating environment is imminent, but it does mean that things are no longer getting worse. And that is something.
“It will improve eventually,” Stanley Chief Financial Officer Donald Allan said of the cost and supply-chain pressures on the company’s earnings call Thursday. “The question is when will it improve, and so that’s why we took this approach around pricing fairly swiftly in the fourth quarter to respond to it. But we may be dealing with some of these supply-chain challenges for another six to 12 months. Hopefully, in the back half of 2022, we start to see them ease a little bit, but we’re prepared for them to continue through the full year of 2022.”
Consumers should be prepared as well.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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