Fortune Brands Earnings: Choppy as Expected, as Demand Shows Signs of Softening

Narrow-moat Fortune Brands Innovations FBIN delivered solid first-quarter results as end-market demand and profit margins held up better than we expected amid a softening economic backdrop. Sales declined 9% (excluding sales from the divested cabinets segment) to $1 billion during the quarter amid weaker repair and remodel and residential construction activity. Adjusted EPS of $.69, while down 24% from the prior year, topped FactSet consensus by 16% as the company’s 13.1% adjusted operating margin modestly exceeded management’s guidance for the quarter. Weaker year-over-year performance is unsurprising as management previously warned of a difficult 2023 operating environment, with impacts being the most acute in the first half due to inventory destocking. We are maintaining our fair value estimate of $72 as we believe Fortune Brands is capable of adequately navigating near-term demand softness.

Management did not sway from its previously issued 2023 outlook of a mid-single-digit decline in repair and remodel activity (two thirds of the firm’s end-market sales) and around a 20% decline in single-family new construction activity. As such, management reaffirmed its guidance for a 5%-7% organic sales decline in 2023 but modestly increased the midpoint of its adjusted EPS guidance to $3.75.

The water innovations segment posted an 8% decline in sales, as better-than-expected volumes in North America were offset by a 35% drop in China. We note that Masco, Fortune Brands’ closest competitor and owner of the Delta plumbing fixtures brand, posted a similar first-quarter sales decline for its plumbing business. The outdoors segment suffered a 16% sales decline as its portfolio of doors and composite decking, which we think is a more cyclical part of the business, was pressured by soft demand. Contrarily, the security segment posted a 2% sales increase due to robust retail demand and momentum in the commercial channel.