Acuity Brands’ (AYI) Mostly Upbeat FY23 Outlook Is In The Spotlight Today

3:09 pm Tuesday, October 04th, 2022

Acuity Brands (AYI) continued its string of double-digit earnings beats and revenue growth in Q4 (Aug) by expanding adjusted EPS 21% yr/yr to $3.95 while also growing revs 12% to $1.11 bln. Unlike last quarter, which saw shares tick lower despite similar headline results, investors are sending shares of the light supplier for commercial, industrial, and residential applications considerably higher today.

We view AYI’s FY23 outlook as the primary driver behind today’s price action. Last quarter, the company did not offer a timeline as to when its supply problems would begin to normalize nor any glimpse into what it was seeing beyond Q4. Investors saw this as slightly concerning, keeping the stock in check. As such, by guiding FY23 earnings and sales mostly above consensus, investors are breathing a heavy sigh of relief that supply chain issues are normalizing and demand is still robust.

AYI targeted adjusted EPS of $13.00-14.50 and revs of $4.1-4.3 bln for FY23. These numbers may translate to just single-digit growth yr/yr at each midpoint, well below the double-digit growth experienced in FY22. However, given that AYI expects to continue facing component shortages and higher cost inventory, which will weigh on sales growth and pressure margins, its FY23 forecast is a positive development.

As an example of component shortages, AYI is still working through a higher-than-normal backlog within its primary ABL segment (which comprised 95% of FY22 revs).

AYI also anticipates sales growth to return to normal levels starting in 2023. This means that investors will need to adjust their expectations moving forward. Before the pandemic, AYI grew around mid-single-digits each year.

Still, AYI’s capital allocation strategy for 2023 is unchanged, meaning that the company remains focused on investing in growth and acquisitions while also maintaining its dividend and share buybacks.

Although it is worth pointing out that AYI will likely not purchase close to the same amount of shares in FY23 as it did in FY22. The company bought back over $500 mln, or just under 10% of its outstanding shares, in FY22, and estimates repurchases to total around $125-150 mln in FY23.

AYI also did not provide M&A details, but we would not be surprised to see a few purchases during FY23.