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: Stanley Black & Decker sees inflation, supply chain problems costing $690 million this year, up to $650 million in 2022

Shares of Stanley Black & Decker Inc. sank Thursday, after third-quarter earnings topped expectations but the tools and storage company cut its full-year outlook amid a “dramatic” increase in costs, which is expected to mostly continue next year.

The company slashed its 2021 guidance range for adjusted earnings per share to $10.90 from $11.10 from $11.35 to $11.65, well below the FactSet EPS consensus of $11.54. Three months ago, the company had raised its EPS guidance from $10.70 to $11.00.

The new outlook includes an estimate of approximately $1.25 a share in costs related to commodity, transit and labor inflation, the company said.

The stock

dropped as much as 5.0% intraday, before paring losses to be down 2.0% in midday trading.

A negative stock reaction to results shouldn’t surprise investors, as the stock has now dropped on the day that eight of the past nine quarterly reports were released, even as the company beat profit expectations in eight of those reports.

On the post-earnings conference call with analysts Thursday, Lee McChesney, vice president of corporate finance and chief financial officer of tools and storage, said container and transportation costs experienced a “dramatic increase” during the quarter, as “average container spot prices are now nearly seven times what we were paying earlier this year.”

He added that the average transit time from Asian suppliers to North American manufacturing facilities and distribution centers has more than doubled, “from approximately 40 days to 85.”

Also read: GE sees inflation impact ‘limited’ for rest of 2021, but dealing with supply chain issues is like playing ‘whack-a-mole.’

“These underlying assumptions raise our full-year commodity and supply chain headwinds to an estimate of approximately $690 million, assuming [the known] impacts continue,” McChesney said, according to a FactSet transcript. “We are also forecasting approximately $600-to-$650 million of carryover cost headwinds for 2022.”

Meanwhile, for 2022, McChesney said benefits from productivity actions and price increases the company has implemented are expected to “exceed” the anticipated headwinds.

The company noted in the analyst call that it put in price increases of 4% to 5% during the third quarter, and are going after another 5% increase globally in the fourth quarter.

Don’t miss: Here’s what it will take to resolve the supply-chain disruptions roiling the U.S. economy.

Read more: Why it’s wrong to compare today’s inflation surge to 1970s-style ‘stagflation.’

Earlier Thursday, the company reported third-quarter net income that rose to $414.2 million, or $2.56 a share, from $385.5 million, or $2.44 a share, in the same period a year ago. Excluding nonrecurring items, adjusted earnings per share came to $2.77, above the FactSet consensus of $2.47.

Sales grew 10.7% to $4.26 billion, above the FactSet consensus of $4.25 billion, as tools and storage sales increased 14%, security sales rose 5% and industrial sales grew 1%. Tools and storage and industrial sales topped expectations, while security sales came up a bit shy, according to FactSet.

Cost of sales jumped 16.1% to $2.87 billion, to outpace the growth in sales, and to lower gross profit margin by 310 basis points (3.1 percentage points) to 32.6%.

“We are prioritizing meeting demand in a universally difficult supply chain environment and are actively addressing the inflationary trends impacting the business with new targeted pricing actions and increased productivity measures,” Chief Executive James Loree said.

Chief Financial Officer Donald Allan said: “Our new round of price increases and surcharges to address the cost inflation that built rapidly in the third quarter will begin to offset higher costs exiting this year and provides the setup for higher margins and operating profit growth in 2022.”

Free cash flow (FCF) was a negative $124.5 million during the quarter, given $129.1 million in capital and software expenditures, compared with positive FCF of $615.1 million a year ago. Year to date, FCF is negative $31.3 million.

For 2021, the company believes FCF will be $1.1 billion to $1.3 billion.

Stanley Black & Decker’s stock has gained 2.2% year to date, while the SPDR Industrial Select Sector exchange-traded fund

has climbed 17.4% and the S&P 500 index

has run up 22.1%.

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