American Woodmark (NASDAQ:AMWD) witnessed good demand in the new construction as well as in the repair and remodel business in Q4 2022. The backlog of the company remains elevated which should act as a buffer for any near-term disruptions in demand due to the slowdown in the market from interest rate increases and affordability concerns. The company is offsetting the inflationary costs by increasing prices and is planning to take further price hikes in fiscal 2023. Due to the lag in the incurred inflation and price realization, the company hasn’t seen full benefit from these price hikes yet. Looking forward, as the pricing increase continues to take hold, we will see a further increase in adjusted EBITDA margins. To improve its profitability, the company also plans to use its strategy which has growth, digital transformation, and platform design as its pillars.
Last Quarter Earnings
American Woodmark recently reported the fourth quarter of 2022 results that were better than expected. Net sales for the quarter were $501.7 million, up 6% year over year and higher than the consensus estimate of $493.2 million. During the quarter, adjusted EPS increased 4.5% Y/Y to $1.38 (vs. the consensus estimate of $1.34). The increase in revenue in Q4 2022 was due to 8.2% year-over-year growth in the new construction business and 4.5% year-over-year growth in the remodelling business. The home centre channel saw a 2.5% year-over-year increase in sales, while the dealer/distributor channel saw an 11.9% year-over-year increase. Due to inflationary costs associated with fuel and materials, the adjusted EBITDA margin fell 130 bps Y/Y to 8.9% in the fourth quarter. However, the adjusted EPS in Q4 2022 increased 4.5% Y/Y due to higher sales partially offset by inflationary costs and supply chain disruptions.
Revenue Growth Prospects
The demand across the new construction business remained strong as a result of which the new construction sales grew 8.2% Y/Y. The overall market starts in single-family homes was up 3% in Q4 2022. The completion in the quarter increased 4.3% Y/Y in Q4 2022 and the timing lag between starts and completions remained at 120-day plus. The remodelling sales grew 4.5% with the made-to-order business and stock kitchen business delivering above-average comps for the period.
In the new construction business, the rising interest rate and home price increases are creating concern for a slowdown in the housing market. However, the strong backlog in the quarter should buffer any short-term disruptions in demand. In April, the made-to-order production levels were at all-time highs whereas the stock platform was challenged with staffing levels, resulting in a decline in units Y/Y. The company is ramping up its assembly line in its Gas City plant to service the made-to-order business and has implemented a number of actions to increase the capacity of stock kitchen and bath production.
Looking forward, the company’s revenue growth prospects look good thanks to its strong backlog, capacity enhancement, and price increases. The company is also making digital investments in customer experience and reinvesting in its manufacturing facilities to reduce labour dependencies, improve quality, and increase capacity. In fiscal 2023, the company expects its new constructions as well as remodelling to grow. The company plans to reduce its backlog throughout the fiscal year and expects pricing to contribute meaningfully Y/Y, yielding mid-teens to high-teens revenue growth.
In Q4 2022, the company’s gross profit margin fell by 170 basis points to 13.9%, down from 15.6% in Q4 2021. This was due to higher material and logistics costs, as well as supply chain disruptions, which were partially offset by higher sales and leverage from fixed costs. The adjusted EBITDA margin fell 130 basis points to 8.9% in the fourth quarter due to higher inflation as fuel costs rose as a result of the Ukraine conflict, as well as higher material costs. For the past few quarters, the company has been increasing prices to offset inflationary costs. Due to lower shipments in Q4 2022, the company was unable to capture a $55 million price increase predicted by management the previous quarter.
The company raised prices in April and has decided to raise prices again in July across the new construction, dealer/distributor, and is in the process of communicating a price increase in the home centre channel. In fiscal 2023, the company intends to implement price increases in stages, beginning with the new construction channel, then the dealer/distributor channel, and finally the home centre. By the end of fiscal 2023, the company should have caught up with all of the inflation in 2022 and 2023 combined through these price hikes. On top of what was realized in fiscal 2022, the cost of goods sold inflation in fiscal 2023 includes an additional 7.5% for materials and logistics. The price increases should help the company offset this inflation. However, there is a lag between cost inflation and realized pricing. So, the EBITDA should improve sequentially from Q2 through Q4.
Apart from price hikes, the company intends to increase profitability in fiscal 2023 and beyond using its strategy with growth, digital transformation, and platform design acting as the three pillars of this strategy. The growth of the business is expected to be realized by expanding its product line and channels. The company is also developing its e-commerce capabilities to assist its partners and better serve its consumers. Under the digital transformation pillar, the company is focusing on improving the purchasing journey of its customers by increasing engagement with them through digital tools. The platform design includes overall manufacturing and distribution footprint, OpEx, and automation efforts to improve margins and customers’ experience.
By the end of fiscal 2023, the company expects EBITDA margins to be in the high single digits to low double digits, with inflationary pressures expected to continue through the first half of fiscal 2023. As price realization grows and platform efficiencies improve, margins should increase sequentially throughout the year.
Valuation & Conclusion
AMWD is currently trading at a P/E of 8.52x FY22 consensus EPS estimate and a 7.23x FY23 consensus EPS estimate which is lower than its five-year average adjusted P/E (fwd) of 14.40x. The company’s healthy order backlog should help offset near-term disruptions in the housing market due to the rising interest rate concerns and higher prices. The company’s margin should improve sequentially as the price realization takes place and the efficiency of the company improves. I believe the stock is attractively priced at current levels given its growth prospect and hence have a buy rating on the stock.
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