Acuity's guide for next year needs lighting to turn gross margin into profit, which it did not do last quarter

The first guide asks for less than last year gave

Acuity Inc. gave its first guide for the coming fiscal year with its results for the fourth quarter: adjusted earnings of $20.50 to $22.00 a share. The middle of that range is 6.8% growth on the year just ended, by our arithmetic.

Where would the growth come from? Last quarter adjusted earnings per share rose 11.0%, but by our arithmetic operating profit supplied only a small part of that; the rest was fewer shares, lower interest and a slightly lower adjusted tax charge. Analyst Tim Wojs of Baird put it to the finance chief, on a back-of-envelope reading, that the range implies little margin gain. She did not dispute that and pointed to memory costs.

Lighting kept its gross margin and lost its operating margin

The larger segment, Acuity Brands Lighting, is where the guide has to be earned. Last quarter its adjusted gross margin rose to 46.2%, but its adjusted operating margin fell to 18.8%. By our arithmetic the costs between those two lines took about two points more of sales than a year ago.

Part of the gap is a high base. A year ago the margin was 20.1%, against 18.3% for that whole year, and the finance chief said the year-ago quarter's sales carried an elevated backlog from orders pulled forward ahead of price increases. Against the quarter before, when it was 18.2%, the margin rose. Even so, the year-on-year change has worsened across the last three reports, from a gain to a fall to a larger fall.

The finance chief attributed the decline to investment in technology, and at the previous report management described the rise in overhead as technology spending that supports gross margin, with leverage on the SG&A line to come when lighting volumes grow. The chief executive now says the overhead will normalize ("That's just 1 quarter, so I wouldn't place too much credence on the fourth quarter.") while also calling the technology spending purposeful. He restated the intention to add "around 50 to 100 basis points" of adjusted operating margin a year in lighting; the year just ended delivered a fall (18.1% against 18.3%).

Memory chip costs arrive in the faster-growing segment

Acuity Intelligent Spaces, the faster-growing segment, is where the memory cost lands. The finance chief said of the hit to its gross margin: "this is around a couple of hundred basis points", or two percentage points, and called that the gross impact. The chief executive said it would probably begin late in the first quarter of the coming fiscal year and run into the second, and that the segment's operating margin should be about flat to slightly up.

By our arithmetic two points is about $25 million a year, on segment sales we estimate at last year's $1.107 billion grown 12%, about a tenth of the segment's adjusted operating profit for the year just ended, before the SG&A leverage the finance chief said would offset part of it. Management's order of play is to secure supply, win the cost back in dollars and restore the percentage later, and the chief executive said the percentage matters less than the dollars. That may be right. It is also a change of subject at the moment the percentage is due to fall.

Last year's cash flow had help the guide does not count

Operating cash flow for the year rose sharply. The finance chief credited operating performance, tariff refunds and lower tax payments, and inventory shrank while sales grew, which cannot go on every year.

The debt borrowed for the QSC acquisition is repaid, the last of it after year end. Net debt at 31 August 2026 was about $61 million by our arithmetic, and the post-year-end repayment leaves it unchanged. The release is preliminary until the audit is done. The next report will test two things: whether lighting's overhead settles as the chief executive says, and whether the memory cost reaches Intelligent Spaces as the two points management has described.