Sluggish Pulse of Lighting in Q3; Acuity Reports

October 6, 2023

David Gordon

Our Q3 Pulse of Lighting survey revealed a continued sluggishness in the US lighting market, barely showing positive on a national basis.

With almost 200 members of the industry reporting,

• A slowdown from Q2, but Q3 is still overall positive although over 40% reported flat or negative performance. It’s a bifurcated market with almost 45% reported growth exceeding 5%. So, there are the “haves and have nots”. On the manufacturer and rep front, overall, it is a flat market (distributors sales benefit from their margin as well as backlog.)
  • And remember, when comparing to last year, and the prior year, the comps are higher as there were price increases and lower interest rates which encouraged construction.
• The markets that appear where the business is are the small and mid-sized retrofit projects with specifically healthcare, education, multi-family (in some geographic markets) generating demand. The new construction market is “challenged”, as expected with interest rates continuing to rise.
• The inventory “right-sizing” we saw the first half of the year appears to have moderated although there is anecdotal evidence that it could continue in Q4 if the market remains flat / declines as companies prepare for the end of the year.
• While 39% of distributors report backlogs are up, 22% report they have declined indicating some distributors are achieving sales growth by working down their backlog and not replenishing it.
  • 80% of manufacturers reported that their backlog either declined or was flat. This is a red flag for Q4 and early 2024.
• So, in Q3 outbound sales are up, inbound orders are down … not a good omen looking forward.
• Distributors report that switchgear shipment delays continue to impact their lighting business due to the delay in projects being ready for lighting.
• From a pricing viewpoint, flat to very nominal price appreciation. Anecdotally we hear of distributors able to negotiate better into-stock SKU-specific pricing if they are open to conversions or stock buys. Contractors are rebidding projects with the hope of price concessions to stimulate business … or are open to value-engineering ideas to lower costs
• In Q3 we did ask about lighting controls.
  • 40% of distributor respondents reported that their lighting controls business is up with growth coming from both embedded and wireless functionality. Given manufacturer investment in this functionality over the past few years, it is good to see that some are starting to have success. Overall controls represented about 5% of a distributors business with wireless / embedded representing about 1.7%.
• Manufacturers and reps, in their conversation with specifiers, still have 40%+ expressing concern looking out 6 months.
• All parties expect Q4 to continue to decline, albeit nominally. Essentially, we’re in a “flat” market looking forward, with some of it supported by backlog.

So, a sluggish market with a dour outlook given that there is nothing to drive the business. It’s a “beat them up” market for every order. A couple of national chains have shared that their performance with large name brands significantly lags their performance with other “white goods” channel-oriented brands. This accounts for a difference in supplier performance vs national lighting market performance.

There are opportunities, however, they vary by market and by market segment.

Survey participants received a complimentary copy of the report earlier this week. If you’re interested in the report details, the report is available for $35 by clicking here.

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Acuity Reports … Q3 Down Significantly

As many know, our Pulse of Lighting Report is sponsored by William Blair, an equity analyst firm. They utilize the insights we gather from the industry, plug some of it into their model (or use the insights to inform them) and then make a projection. Their recommendations and analysis of Acuity are in the Pulse of Lighting report as an addendum; however, I mention this as they were “spot on” with Acuity’s recent quarterly report … -9%.

Let’s look at Acuity’s performance, via a transcript and their presentation, with a focus on their lighting segment, ABL (Acuity Brands Lighting):

• Recognizing that the “growth” period isn’t a story, Acuity is focused on margin, cash generation, net performance, and earnings per share. All which they reported was positive.
• Acuity now groups its lighting product offering into:
  • Contractor Select
  • Design Select
  • Made to Order
• Company is “strategically managing price” (so, discounting where it needs to in order to win, which probably means “white goods” and large projects with distributors supporting the entire offering receiving more benefits … if they ask. In the Q&A with analysts Acuity called out that they are “investing” in price to be competitive for their Contractor Select offering.)
• In Q3, Company has focused on product vitality, with refreshing 20% of its offering.
• Acuity expects “roughly the same market conditions in lighting for the remainder of this calendar year, with the potential for some improvement in the next calendar year.” (this is consistent with our Pulse of Lighting findings.)
• Q3 (their Q4) sales
  • Total was about $1 billion, which was a 9% decline.
    • ABL net sales down 11%.
    • It’s important to note that an Acuity strength is the large construction market, which, nationally, is relatively weak.
  • Full year FY 2024, Acuity is projecting net sales between $3.7-4 billion which means a decline of low to mid-single digits for their lighting business.

From analyst questions:

• C&! network is about 60% of their business
• “Getting to a more normal relationship between order rate and shipment rate” (so, minimal backlog.)
  • Lead times are in the 20-30 day range.
• Want to grow their platform via acquisitions and have the cash to achieve this.

Takeaways

So, overall, the lighting market is “challenged” but it’s a significant part of the electrical distribution market. After the past two growth years, it’s tough to be up due to macroeconomic elements and the fact that the market is not able to “live” off of price increases. Further, comps were high.

However, there are opportunities in the market as a significant percentage of distributors continue to report sales increases.

What are you seeing in your local market? What do you think about Acuity’s results?

More information available here