Prepared remarks
Welcome to the Stanley Black & Decker Second Quarter Earnings Call. My name is Shannon, and I'll be your operator for today's call. Please note that this conference is being recorded. I will now turn the call over to Vice President of Investor Relations, Michael Wherley. Mr. Wherley, you may begin.
Good morning, everyone, and thanks for joining us for our second quarter earnings call. With us today are Chris Nelson, President and CEO; and Patrick Hallinan, Executive Vice President, CFO and Chief Administrative Officer. Our earnings release, which was issued earlier this morning and a supplemental presentation, which we will refer to, are available on the IR section of our website. A replay of today's webcast will also be available beginning around 11:00 a.m. Eastern Time. This morning, Chris and Pat will review our second quarter results along with our updated outlook for 2026, followed by a Q&A session. During today's call, we will be making some forward-looking statements based on our current views. Such statements are based on assumptions of future events that may not prove to be accurate, and as such, they involve risk and uncertainty. It's therefore possible that actual results may differ materially from any forward-looking statements that we might make today. We direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent '34 Act filings. Additionally, we will also discuss non-GAAP financial measures during the call. For applicable reconciliations to the related GAAP financial measures and additional information, please refer to the appendices in today's earnings release and supplemental presentation. I'll now turn the call over to our President and CEO, Chris Nelson.
Thank you, Michael, and thank you all for joining us today. Stanley Black & Decker delivered a solid second quarter. Through disciplined execution of our strategy, we are delivering profitable organic growth and remain on track to achieve full year sales and margin targets. We are confident in our strategy and in the team's ability to continue to execute and deliver results. Total revenue for the second quarter was in line with prior year and up 3% organically. This was slightly ahead of our expectations, driven primarily by volume strength in the U.S. across both retail and the commercial and industrial channels within Tools & Outdoor. Our adjusted gross margin rate of 33.7% was up 620 basis points year-over-year, largely supported by gross productivity and product mix. We also received tariff refunds during the second quarter, which contributed to adjusted gross margins. We will use tariff refunds to accelerate growth investments, and we have incorporated the net impact within the revised EPS and cash flow guidance that we will outline today. Second quarter adjusted gross margins included a benefit of approximately 250 basis points from these net tariff refunds. Adjusted EBITDA margin of 11.3% was up 320 basis points year-over-year, slightly ahead of our planning assumptions for the period. Adjusted earnings per share were $1.57, $0.37 above the midpoint of our guidance range. Below-the-line items contributed about $0.20 and net tariff refunds contributed about $0.17. Pat will discuss this in more detail as well as our underlying guidance assumptions for the balance of the year. Following the sale of our aerospace fasteners business early in the quarter, we were able to deploy those proceeds plus additional operating cash flows to pay down debt by $1.7 billion and buy back 3.2 million SWK shares for $250 million. We are continuing to advance our strategy with a focused portfolio, balance sheet strength and a thoughtful approach to capital allocation. Our priorities remain to invest in growth, support the dividend, repurchase shares and pursue M&A if and when appropriate. Turning to second quarter operating performance by segment. I'll start with Tools & Outdoor. Second quarter revenue was approximately $3.6 billion, up 3% year-over-year. Organic revenue was also up 3%, comprised of 3% volume growth from strong demand generation and flat pricing versus the prior year. Currency was a 1% benefit in the quarter, which was offset by the impact of the previously announced strategic transition to a licensing model for the gas walk-behind outdoor products. We were encouraged by the organic growth we saw across our three global priority brands, DEWALT, STANLEY and CRAFTSMAN in the quarter. Supported by well-executed demand generation, Tools & Outdoor second quarter adjusted segment margin was 11.8%, which was up 380 basis points year-over-year. This was predominantly due to net productivity gains and favorable product mix. Net tariff refunds also contributed approximately 150 basis points. Now for additional context on the top-line performance by product line in the second quarter. Power tools organic revenue increased by 8% and hand tools, accessories and storage organic revenue increased by 2%, which were both driven by strong market activation and global priority brand performance. Outdoor organic revenue decreased 7%, pressured by fewer replenishment orders as a result of weather-related demand softness. As for Tools & Outdoor performance by region, in North America, organic revenue increased 4%. U.S. retail was up mid-single digit as a result of strong demand generation. This includes strength across DEWALT, STANLEY and CRAFTSMAN and improved penetration and presence with channel partners. Momentum across the U.S. commercial and industrial channel accelerated and revenue in this channel grew low double digits in the quarter with the continuation of key investments complementing strong market demand, which I will elaborate on in a moment. North America point of sale in aggregate was broadly consistent with reported home improvement consumer credit card data with strength in power tools and softness in outdoor. In Europe, organic revenue was down 2%, although growth continued in our prioritized investment markets, including Eastern Europe and Iberia. This was more than offset by challenging market conditions in France and other parts of the region. The Rest of the World organic revenue was up 3%, led by double-digit growth in Latin America with strength driven by innovation and investments in pro channels. Across the rest of the region, there were broad-based contributions, partially offset by pockets of market softness and disruption from the Middle East. Turning now to Engineered Fastening. Second quarter revenue was down 18% as the Aerospace Fasteners divestiture reduced revenue by 21%. On an organic basis, the segment grew 3%, with volume contributing 2% to growth and higher pricing contributing 1%. Currency was flat. Organic revenue performance was driven by low single-digit organic growth in Automotive Systems and Fasteners, which outpaced the market as well as broad-based strength across global industrial markets, resulting in high single-digit organic growth for that portion of the business. Adjusted segment margin for Engineered Fastening was 13% in the quarter. Year-over-year expansion of 220 basis points was largely driven by net productivity gains and favorable volume and mix in automotive. Net tariff refunds contributed approximately 50 basis points. Segment margin continues to be favorable on a year-over-year basis. In summary, through effective market activation and demand generation and consistent execution of operational cost improvements, we delivered second quarter top-line and margin performance for both segments slightly ahead of our expectations, and we are confident in achieving our full year targets. Before I turn to our brand and strategic highlights for the quarter, I want to take a moment to remind everyone of our guiding ambition, and that is to empower our end users to conquer their greatest challenges through groundbreaking solutions and becoming their partner of choice. Accomplishing this requires a commitment to quality, agility and innovation. That ambition is shaping how we focus our portfolio, where we invest and how we execute. It is also at the core of the strategic imperatives guiding our company, purposeful brand activation, operational excellence and accelerated innovation. As we continue to build a world-class branded industrial company, the progress we are making across DEWALT, STANLEY and CRAFTSMAN is a reflection of our strategy in action. Across all three brands, innovation and platforming are helping us to move faster and serve end users more effectively. We are directing investments towards the markets with the best prospects for growth, working together with our channel partners to serve end-user categories where we see the greatest opportunity to activate each of our brands, deepen market penetration and generate attractive returns. And underpinning all of this is our continued focus on operational excellence, which is enabling us to execute with discipline in what remains a geopolitically uncertain environment. I'll start with DEWALT, which continues to lead as our growth engine focused on the Pro. In a world with limited supply of skilled trade labor, our professional end users are looking for solutions that help them to work more productively and with greater confidence while remaining safe. That need is increasingly relevant in nonresidential construction, where the market context is strong, especially in areas like data centers, power generation and prefabrication manufacturing. The majority of the professional needs in this space are served through the commercial and industrial distribution channel. Against that backdrop, we expect our U.S. commercial and industrial channel annual sales to approach 10% of total Tools & Outdoor sales in 2026, assuming roughly double-digit organic growth this year. Our ambition for DEWALT is to be the partner of choice for the professional end user. This means serving the full cycle of design, construction and operations for large-scale commercial projects. This is more than a statement or an aspiration. It is the direction that has been guiding our investments to drive demand with the professional, including strong penetration within the U.S. commercial and industrial channel. Projects predominantly served by this channel represent trillions of dollars of committed capital spending over the next five years. The expectations are demanding. The timelines are tight, and the owners and project managers have no tolerance for downtime. To succeed in this type of environment, holistic solutions are required to support our customers and end users every hour of every day. Over the past two years, I have spoken about the investments we are making to strengthen our go-to-market capabilities and expand our field presence. Let me talk about how that comes to life in the U.S. commercial construction market. We have hired professionals with deep experience in large job site processes and project management and dedicated them full time to specific large construction sites. As project solution managers, their role is to serve as the primary point of contact for the general contractor, ensuring DEWALT shows up as a coordinated partner to support successful project execution. Take a look at Slide 6. The person pictured in the center is one of our DEWALT project solution managers. I spent a day with him recently at a major data center project. Our project solution managers are the central hub of all DEWALT activity happening on a project site. In addition, DEWALT assets and capabilities encompass the commercial construction ecosystem and our approach to full-scale project life cycle solutions. We always begin with safety and productivity. Our Perform and Protect product line of over 200 end user-oriented solutions are designed to defend against one or more of the following: dust inhalation, loss of torque control and tool vibration without sacrificing the performance that professional end users demand. These safety features are especially important when we are working with the owners and general contractors at the mega construction sites. We support the end-to-end workflow through an integrated hardware and software portfolio. For example, our anchor and fastening solutions are valued by our end users as part of our comprehensive offerings, which span the design, construction and operations of a job site. DEWALT construction technology, digital solutions also complement our hardware portfolio and all work together to support a safe, productive and profitable job site. We also partner with local distributors to offer on-site product availability, allowing us to serve the professional end users directly on the job site. Next is training. We provide on-job site training resources in partnership with the general contractor. We align with the project schedule to provide tailored application-based training for the specific tools and work being done each day. We take a 360-degree approach to training and recently launched DEWALT On-Demand, which allows users to scan a QR code on a tool and access multilingual manuals and resources online whenever they need them. To surround and engage with the end user, we have invested in hiring hundreds of trade specialists that work with contractors in the market to ensure that they are familiar with and have access to all DEWALT solutions designed for their particular trade. We bring the newest innovations to them and help them operate from their fabrication shop to the job site. We have also hired salespeople to call on the distribution channel to ensure that our products and solutions are always available to end users, contractors and job sites. Further complementing the Global DEWALT brand strategy, including the efforts of our trade specialists in the field and our sales and distribution resources, our global DEWALT No Quit marketing campaign is ramping up across digital channels and our global influencer network continues. We are seeing indicators that this campaign is having a measurable impact on demand generation. We also invest in trade schools to help build a well-trained workforce. Over the last three years, we have invested $27 million through our DEWALT Grow the Trades program, and we're committed to investing $60 million by 2030. These efforts support the critical need for skilled tradespeople and are also synergistic with our business strategy. At the same time, we work with the owners and developers of mega construction sites to understand where and how they will need skilled tradespeople for future projects. We then bring these learnings back to trade schools to help build, educate and upskill workers for the future. Through our full ecosystem approach, DEWALT makes sure the right products are in the hands of well-trained end users at the right time. Taken together, these capabilities and initiatives continue to deepen DEWALT's relevance to help improve safety, productivity and profitability for our end users while strengthening our position as a trusted partner. It also further reinforces DEWALT's role as a key driver of profitable organic growth. In addition and just as encouraging is the performance across the STANLEY and CRAFTSMAN brands. While there is work ahead, we believe positive organic growth in the second quarter for both brands is an important indicator that the actions we are taking are translating into results. In the case of STANLEY, a brand revitalization, product refresh and commercial actions are building STANLEY's position in the market and creating a more durable platform for consistent growth over time. Our international field resources are focused on working closer with channel partners to refresh in-store walls and optimize shelves in ways that help improve sell-through, broaden assortment uptake and strengthen conversion into our brand. Similarly, CRAFTSMAN brand positioning and portfolio expansion is resonating with consumers, and the new V20 advanced batteries have been well received and supported strong V20 platform performance in the quarter. CRAFTSMAN continues to strengthen its role within our business portfolio with an improving margin profile and a robust product road map, including the wave of new products hitting shelves now and through the balance of the year. There is an exciting runway for continued growth ahead. None of this would be achievable without the commitment of our teams around the world. I want to thank them for maintaining a customer-centric approach and for continuing to advance our vision of building a world-class branded industrial company. Their focus, resilience and execution are what make our progress possible. I will now pass the call to Pat to discuss more detail on the performance in the quarter, to outline our 2026 guidance and to share progress on a few key performance metrics.
Thank you, Chris, and good morning to everyone joining us today. I will start by providing a bit more detail on our adjusted EPS outperformance in the second quarter and then turn to guidance. As Chris noted, second quarter adjusted EPS was $1.57, exceeding the midpoint of our April guidance range by $0.37. Above-line operating performance was largely in line with our expectations with the outperformance primarily driven by below-the-line items and the net tariff refund benefit. The below-the-line items made up approximately $0.20 of the outperformance, with roughly half of that from discrete tax items, along with lower interest expense and other factors. The tax benefit was purely timing, and we still expect the adjusted tax rate to be at 19% for the full year. Relative to our expectations for 2Q, interest costs came in lower due to strong operational cash flows, which meant less short-term debt on the balance sheet. On a year-over-year basis, interest expense was lower due to the debt reduction following the CAM sale in the quarter. The remainder of the outperformance came from a net tariff refund benefit in the quarter. This net benefit reflects the Phase 1 tariff refunds we received during the second quarter, partially offset by variable incentive compensation, growth investments and taxes associated with those refunds. While a portion of the costs offsetting the refund landed in 2Q, the remaining portion will flow through in the second half of the year, primarily in the form of incremental growth investments. This is why we are not adding the full $0.17 benefit realized during 2Q to our full year EPS guidance as the incremental investments will be reflected in 3Q and 4Q EPS. But the bottom line is this, tariff refunds provide us with the flexibility to accelerate investment in our strategic growth priorities, and we have already started making such investments in the second quarter. Now let me talk you through some of the key underlying assumptions embedded in our updated guidance. First, consistent with the prior guidance assumptions, we maintain our view that the new Section 301 tariffs, including those implemented just last week, are likely to be introduced during the next few months at the same level as the old IEEPA tariffs, which means our underlying run rate tariffs costs are expected to return back to the prior IEEPA levels within a few months. This is our current expectation, but as policies are finalized, we may update our assumptions as appropriate. Second, a temporary period of lower tariff rates continues to persist as the Section 122 tariffs were lower than the former IEEPA tariffs and the subsequent 301s are not yet fully implemented. This temporary tariff tailwind, however, is still being offset by persistent inflationary pressures from battery metals, tungsten, oil and oil derivatives. For 2026 guidance purposes, we expect these to neutralize each other. Given inflationary pressures remain persistent, it appears more likely than not a price increase will be necessary by 2027. Third, as we think about the full year, we are only including the tariff refunds we have received during the second quarter, along with the partially offsetting costs and taxes. We have not included any possible second half tariff refunds in guidance because the timing and amounts remain too uncertain to include. Moving on to our guidance metrics. For 2026, we are raising and tightening adjusted earnings per share to be in the range of $5.20 to $5.80 representing year-over-year growth of 18% at the midpoint and $0.20 higher than the midpoint of our prior guidance range. Approximately $0.15 of the increase is below the line, reflecting lower interest expense due to better cash performance, the share repurchases we did in the second quarter, which will reduce our weighted shares to around 151 million for the year and lower expenses on the other net line from the first half. The remaining $0.05 reflects the expected net tariff refund benefit. We continue to expect our revenue outlook to be consistent with our prior guidance framework. Total company revenue will be about flat compared to last year, and organic revenue is still expected to grow by a low single-digit percentage year-over-year, split about evenly between volume and price. This outlook reflects our continued focus on pivoting to growth and our confidence in seizing the share opportunities across our key markets. Moving to gross margin expectations. In line with prior guidance, we anticipate full year adjusted gross margins will expand by approximately 150 basis points year-over-year, exclusive of the net tariff refund benefit. This is primarily driven by net productivity with additional contributions from pricing and product mix. We estimate that the net tariff refund will add an incremental 60 to 70 basis points to our full year adjusted gross margin forecast. We continue to have conviction in achieving 34% to 35% adjusted gross margin in the second half, and I will talk more about that on the next slide. We now expect SG&A as a percentage of sales to be around 23%, which includes about 60 basis points of incremental costs from compensation accruals and growth investments related to the tariff refunds received. We will continue to manage SG&A thoughtfully, allocating capital to strategic investments that position the business for long-term share gains. Keep in mind, this allocation of refund dollars to growth investments is incremental to the $75 million to $100 million of growth investments we planned for 2026 at the start of the year. They will further advance our robust innovation pipeline and fuel market activation with the goal of enhancing brand health and accelerating organic growth. Free cash flow ranges have been raised to incorporate tariff refunds received in the second quarter. With that, we expect to deliver within the range of $600 million to $800 million, including projected taxes and fees associated with the CAM divestiture. Excluding such payments, free cash flow is expected to be in the range of $800 million to $1 billion. Our free cash flow performance is supported by a disciplined approach to working capital management, progressing inventory towards pre-pandemic norms while remaining attentive to our ongoing tariff mitigation and footprint optimization initiatives. We were pleased to make progress on inventory reduction in the first half. Looking at our segments, we reiterate our plan for organic revenue growth and segment margin expansion in both segments. Tools & Outdoor is still expected to deliver low single-digit organic growth in 2026, led by market share gains in what we anticipate will be a roughly flat to down market. Through the remainder of 2026, we expect our demand generation initiatives, new product launches and strategic investments in the brands will position us to grow the top line with a focus on outperforming the market. Adjusted segment margin is expected to improve year-over-year, driven primarily by productivity gains, tariff mitigation and thoughtful SG&A management. Engineered Fastening continues to be on track to grow low single to mid-single digits organically, and we expect both our auto and industrial pieces will outperform the market. Adjusted segment margin is expected to improve year-over-year, primarily due to volume leverage and continuous operating improvement. Turning to our other 2026 assumptions. Our GAAP earnings guidance of $4.60 to $5.45 includes pretax non-GAAP adjustments ranging from $0 to $40 million, inclusive of the second quarter CAM gain. Our full year interest expense is now expected to be about $255 million, which is slightly lower from prior guidance, resulting from a lower debt profile and strong free cash flow performance year-to-date. We now expect other net to be about $230 million, owing to lower cost in the first half. Now for the third quarter guidance. We anticipate net sales to be around $3.7 billion, which will be flat overall due to the portfolio moves, including the CAM divestiture and transition of gas walk-behind mowers to a licensing model. On an organic basis, we expect sales to be up 3% to 4% for the total company as well as for the Tools & Outdoor segment. Adjusted earnings per share are expected to be approximately $1.50 to $1.60, including the incremental investments directly related to the second quarter tariff refunds. Our adjusted EPS for the quarter assumes a planned tax rate of approximately 22% and a share count of about 150 million. Turning now to Slide 8. Our path forward on margin expansion and capital deployment remains consistent with what we outlined previously. In the first half, we overdelivered on the year-over-year improvements we anticipated, whether you include the net tariff refund or factor that out. We are encouraged by this and see it as further evidence of our ability to navigate a difficult macro environment and still meet our targets. As we look to the second half, we continue to have conviction in adjusted gross margin reaching the 34% to 35% range for the half year, a long-standing objective that continues to guide our efforts and priorities. This target assumes no meaningful impact from the tariff refunds received to date since that benefit landed in the second quarter AGM and most of the related second half investments are landing in SG&A. This second half improvement is expected to be driven by productivity and tariff mitigation initiatives, the latter of which should make a meaningful contribution as we continue to make progress on USMCA compliance and shifting production for our U.S. tools business from China to North America. We continue to target 35% to 37% adjusted gross margin by the end of 2028, as we stated on our last earnings call. On capital deployment, we closed the CAM transaction on April 6. We have used the vast majority of the net proceeds towards debt reduction of approximately $1.7 billion in the second quarter. We also executed $250 million of share repurchases during the quarter, as Chris mentioned, we will pursue share repurchases opportunistically. Such repurchases will remain a capital allocation priority for the near term. We are firmly on track for net debt to adjusted EBITDA to be at or around 2.5x by year-end, inclusive of buybacks. Free cash flow outperformed in the first half, landing at approximately $250 million, which included positive contributions from both operational cash flows as well as tariff refunds. We remain committed to disciplined capital allocation and accelerating value creation for our shareholders, including funding organic growth, returning excess capital to shareholders efficiently and if and when appropriate, considering bolt-on M&A. All the while we strive to maintain an investment-grade credit rating. With our sharpened portfolio, disciplined cost and capital allocation and a relentless focus on our customers, we have the foundation in place to respond to market dynamics, deliver growth and create long-term value for our shareholders. Thank you. I will now return the call back to Chris.
Thank you, Pat. As you heard this morning, we are focused on what we can control, i.e., executing our strategy. We are confident in our path forward and our ability to activate our brands to generate demand, drive operational excellence for efficiency and productivity gains and accelerate innovation to serve our end users. We remain committed to driving towards our near-term targets and long-term goals. Through disciplined execution of our strategic priorities, we are strengthening Stanley Black & Decker's ability to deliver sustainable, profitable growth and create long-term value for our shareholders. We are now ready for Q&A, Michael.
Thanks, Chris. Operator, we can now start the Q&A.
Questions and answers
Operator provided Q&A instructions.
Maybe just first question, Chris, could you add some color on the rebound that you saw in the power tools business this quarter? I know it's been weaker the past few quarters. So maybe there's some catch-up there. But I think 8% growth in that line of business might be the strongest growth rate we've seen in several years. So just could you talk about kind of what changed and how sustainable that type of growth is?
Yes. Nice to hear from you, Tim. We're excited about that trend in the business. When we think about all the things we've been focused on doing in the professional segment and with our retail and channel partners, we really believe that work is starting to come to fruition. We saw increased placement with many of our key channel partners as they have seen the benefits of our product development pipeline coming through, not only in DEWALT, but also STANLEY and CRAFTSMAN, as we referenced earlier. We also sharpened our focus on how and where we were promoting. Those promotions have been very strong for the company and accretive as you saw in the margin line. We are excited about the momentum and pleased to see growth across all three of our core brands.
Okay. Great. And then maybe just as a follow-up, Pat, it sounds like in the guidance, the IEEPA kind of tariff assumptions are kind of offsetting raw materials. But then it also sounds like at some point, you're going to have to kind of take price. So is there any way to kind of bucket or size what the raw material kind of annualized inflation impact might be at this point?
Yes, there's a lot of moving parts, Tim. I wouldn't conflate IEEPA with inflation, at least not the IEEPA refunds. The IEEPA favorability we had this year came when those particular tariffs stopped after the February court ruling and were replaced by lower level Section 122 tariffs. They provided favorability this year. As we've said on the last earnings call, inflation in battery metals, tungsten, oil and oil derivatives have created inflationary headwinds. In terms of order of magnitude in this year's P&L, it's roughly on the order of that magnitude — headwinds and tailwinds offsetting. On the actual IEEPA refunds, those are netting out at about $0.05 on the full year; they were $0.17 in the quarter. The difference between those two is the timing of the growth investments. The preponderance of the growth investments will take place in the third and fourth quarter. As we look into next year, you're probably looking at a run-rate inflation that's roughly equivalent to that headwind, somewhere around $100 million, but we'll continue to refine our view as we finalize plans for '27. We are committed to our margin targets and our pivot to growth, and we'll address inflation as necessary to achieve those targets while driving growth.
Our next question comes from the line of Nigel Coe of Wolfe Research.
Chris, I just wanted to maybe expand on Page 6, where you laid out some of the investment priorities. The spirit of my question is on the second quarter, the big pickup in SG&A — it's not easy to efficiently invest so quickly. Are we seeing more investment in new product vitality engineering? Are you hiring more people? Just curious how you're deploying the investment spend so efficiently?
Nice to hear from you, Nigel. Our confidence in investing comes from putting dollars into the core areas we've discussed: go-to-market activation with feet on the street, enhanced investment in social media for brand activation and the product pipeline. Over the past few years, we've been judicious and deliberate in building the infrastructure and capabilities to absorb and drive accretive growth from investments. As we've accelerated investment, including some of the refund dollars, we've doubled down in those areas where the market is ready and where our company has the structure and leadership to take advantage. We've tracked ROI and seen positive progress and payoff. So we're accelerating some planned investments and focusing on areas where we've already demonstrated success. We feel very confident about where we're investing those dollars.
That's a great point, Chris. So you mentioned pulling forward some investments. Does that imply that we're seeing some 2027 investment pulled into 2026? And related to that, if your total tariff refunds could be considerably more than $100 million or so, would you further accelerate investment spend if you do get more refunds in the second half of the year? Or are there other things you can invest in to absorb that benefit?
Yes, there is some acceleration and we've been building a multiyear roadmap for where we want to grow and invest, so there was a clear set of opportunities to accelerate. As for future tariff refunds, as Pat stated, none of that is in our guidance. At this point, amount and timing are too uncertain. Should there be additional refunds, we have a roadmap and know how we would deploy them. That wouldn't be a bottleneck for us.
Our next question comes from the line of Rob Wertheimer of Melius Research.
I wanted to follow up. On the growth reinvestments, as you've gotten the tariffs and you're reinvesting, is it that your marketing is more effective than it was? How much of these are price discounts and is the market more price sensitive and that's why you're seeing a bigger return? It just seems like you put together the power tools, 8% and the comments you made that you're seeing pretty good return. I'm curious what's changed — more price sensitivity, more innovation, more targeted marketing?
Rob, thanks for the question. We've been building momentum by consistently investing in people, go-to-market, products and innovation over a number of years. With those capabilities now in place, we're seeing the opportunity meet our preparation. The consumer is generally more motivated by promotion right now. Fortunately, the products we want to promote are also the products that drive the best return and margins. There's not a single answer — it's multiple quarters of consistent work starting to pay off. There remains hard work ahead and macro volatility, but I'm confident in our ability to continue our consistent approach and make decisions to keep both growth and the margin journey moving forward. Pat referenced inflation we see ahead and we'll make pricing and other decisions as required to maintain margins while driving growth.
Our next question comes from the line of Adam Baumgarten of Vertical Research Partners.
I just had a question on the year-over-year promotion benefit. Do you have a sense for how much that impacted the volume growth in Tools & Outdoor in the second quarter?
No, Adam, I wouldn't say we have a precise number. The growth we're seeing is part of a multiyear game plan. We continue to build momentum across each brand with a mix of innovation and marketing levers. We started talking about competitor pricing earlier in the year and have been tailoring our promotions differently this year. We haven't changed list prices and we don't intend to lower them. What we've been doing is dialing in promotional activity as we've learned more about elasticity in this post-tariff, higher inflation environment. We continue the longer-term investment journey in innovation and brand building to drive continued growth.
Okay. Great. Good to hear. And then just switching to Engineered Fastening, on the industrial side, maybe the pockets of strength you saw in terms of end markets there would be helpful.
In Engineered Fastening, credit to Thomas and the team for focusing the business over the past 24 months on industries where we have differentiated advantages. Automotive has been a key area where we've outperformed, and in the industrial segment we've seen strong performance in solar and in applications used in data centers. The team shifted resources, innovation, application engineering and processes to be more responsive to customer needs. We're in the early innings, but it's good to see the progress.
Our next question comes from the line of Jonathan Matuszewski of Jefferies.
This is Andres. I'm on for Jonathan. In the past, you've spoken about STANLEY and CRAFTSMAN turning positive by midyear and in the second half of '26. With both brands turning positive organically in Q2, is it fair to say those brands are exceeding the timeline you had set? And then looking ahead specifically for CRAFTSMAN, can you talk about how the new product in V20 is setting that brand up to capture share when the DIY demand market recovers?
I'll start by saying we're still on pace for the timelines I laid out. It's encouraging that all three core brands grew in the quarter, but there's still work ahead. The benchmarks of improving STANLEY in the back half of the year and CRAFTSMAN into '27 remain the targets. Regarding V20, the new advanced batteries and supporting products have set us up for success as we build a desirable ecosystem. The right products at the right performance and price points should expand our addressable market in DIY. Channel partners have been supportive and excited about the innovation and expanded V20 platform, and that is a significant part of the equation.
Our next question comes from the line of David MacGregor from Longbow Research.
I wanted to ask about working capital. You've guided to $600 million to $800 million in free cash flow. How much of that is working capital contribution? I think you indicated $200 million last quarter. Also, to the extent you're investing in programs that continue into 2027 and are productive, will they require working capital support and how will that influence cash flow?
For this year, on a full year basis, we're still targeting $200 million of working capital reduction contributing to overall cash flow for the year. Nothing material has changed in that regard. We're working toward a run-rate days sales and inventory level around 135 days, which moves us toward pre-COVID norms. There are footprint transitions ahead that can cause ebbs and flows, but I don't see anything that knocks us off that trajectory. We'll be a good portion of the way there by year-end.
Our next question comes from the line of Brett Linzey of Mizuho.
Lots of moving pieces here. As it relates to Q2 performance, you were well ahead, including the tariff refunds, but were below on an underlying basis versus my forecast. Were there cost or productivity actions you planned to take in Q2 that you might have shifted to future quarters as visibility on refunds began to form? How did Q2 underlying performance come in relative to your internal forecast?
Brett, Q2 was very much in line with our expectations. Operationally, the key metrics of growth and adjusted gross margin without the tariffs and operating income dollars were right around our plan. We did get benefits in the quarter from tariff refunds that came ahead of the investments we'll make in Q3 and Q4. Below the line, we had favorable items like lower interest expense and a discrete tax item that was about $0.10. So, operationally on the mark with some positives on sales and gross margin and some below-the-line favorability. The back half of the year, we'll invest a portion of that tariff refund favorability. The $0.17 net in the quarter becomes approximately $0.05 net on the year after those investments. We're delivering in a challenging environment and using funds to make this a good year and set up future growth.
Our final question comes from the line of Sam Reid of Wells Fargo.
This is Eric on for Sam. You kept the second half gross margin guidance of 34% to 35%. Can you talk to the cadence of how you're looking at Q3 versus Q4? With still elevated costs and tariff changes, does that change how you're thinking about sequencing or the puts and takes within Q3 or Q4?
Eric, both quarters are expected to be in the 34% to 35% range, with Q4 potentially slightly ahead of Q3. Recall that much of what flows through COGS in a quarter was put on the balance sheet months earlier, so inflation that unfolds now has a modest effect on a current quarter and mostly affects the balance sheet into next year. The inflation dynamics are clear to us and we're designing plans to keep '27 on our targeted trajectory. A lot of third- and fourth-quarter gross margin delivery is already on our balance sheet; quarter-to-quarter variances will be driven by product mix, holiday season timing and promotional mix. The structural cost elements to deliver 34% to 35% are in place.
That is all the time that we have for the Q&A. We'd like to thank everybody for their time and participation on today's call. If you have any further questions, please reach out to me directly. Have a good day.
This concludes today's conference call. Thank you for your participation. You may now disconnect.