Fortune Brands Lowers 2026 Outlook as Q3 Operating Profit Falls

Fortune Brands Innovations Inc. (NYSE: FBIN) lowered and narrowed its full-year 2026 earnings outlook after third-quarter sales and operating profit declined, reflecting softer demand, service-level challenges and weaker U.S. new construction activity. The company also outlined portfolio actions targeting businesses with $320 million to $330 million in annualized sales and $50 million to $55 million in operating losses as part of a multi-year turnaround plan.

Fortune Brands now expects 2026 net sales of $4.205 billion to $4.275 billion and diluted earnings per share before charges and gains of $3.20 to $3.30. Its previous outlook called for sales to decline by a low-single-digit percentage and adjusted EPS of $3.22 to $3.52.

The company projected fourth-quarter sales of $925 million to $995 million and adjusted EPS of $0.19 to $0.29. The midpoint of the EPS forecast is $0.52 below the midpoint of its prior guidance, with the presentation attributing the difference to portfolio optimization actions, core business and end-market conditions, channel inventory, portfolio alignment costs and net tariff refunds.

Third-quarter margins contract

Net sales for the quarter ended Sept. 26 fell 3.1% to $1.11 billion. Excluding the impact of China sales, revenue declined 2.4%.

Operating income before charges and gains dropped 24.6% to $155.5 million, while the corresponding margin contracted 390 basis points to 14.0%. The operating-income figure included an $18 million benefit from net tariff refunds.

Adjusted diluted EPS rose 4.6% to $1.14, including a $0.28 net tax benefit from an internal restructuring of the company’s European legal entities and a $0.14 benefit from net tariff refunds. On a GAAP basis, operating income fell 52% to $60.4 million, net income declined 29.5% to $49.9 million and diluted EPS decreased to $0.42 from $0.59.

Water, Fortune Brands’ largest segment, recorded a 5.5% sales decline to $584.5 million. Excluding China, Water sales fell 4.3%. The company cited service levels, softer retail demand and a slowdown in wholesale new construction, partly offset by e-commerce growth. Segment operating income before charges and gains fell 31.8% to $103.1 million, and margin narrowed 680 basis points to 17.6%. A tariff-refund benefit of about 135 basis points was outweighed by pricing below inflationary levels, volume deleverage and higher customer-service costs.

Outdoors sales increased 0.8% to $347.4 million, or 3.4% excluding Fiberon. Favorable comparisons for channel inventory and price realization were partly offset by slower wholesale new construction demand, primarily affecting Therma-Tru. Adjusted segment operating income was nearly flat at $53.3 million, with margin down 20 basis points to 15.3% as volume deleverage and higher material and freight costs offset favorable mix.

Security sales declined 2.4% to $181.8 million as lower retail and e-commerce revenue related primarily to service levels outweighed commercial growth and greater penetration among Yale’s multifamily customers. Adjusted operating income rose 16.9% to $38.8 million, and margin expanded 350 basis points to 21.3%. Net tariff refunds contributed about 715 basis points, while an inventory adjustment tied to SKU rationalization reduced margin by roughly 450 basis points.

Portfolio changes support turnaround plan

Fortune Brands said it is in the early stages of a multi-year plan intended to restore sustainable growth and margin expansion. The plan includes reorganizing the company into customer-focused business units, addressing underperforming operations, expanding in commercial and repair-and-remodel markets, strengthening new-product development and improving operational efficiency through sourcing, Lean practices and artificial intelligence.

The company has agreed to sell its Fiberon composite decking business for $160 million, with completion expected before the end of 2026. It plans to use the proceeds to reduce net leverage and reinvest in the business.

Fortune Brands will also exit commercial operations serving China’s domestic market while retaining manufacturing, research and development, and sourcing activities supporting North American markets. That reorganization is targeted for completion by the end of the third quarter of 2027. Separately, the company plans to rationalize the European footprint of a Water business by the fourth quarter of 2027.

Management expects the combined actions to be accretive to earnings and margins, with the full run-rate benefit by the end of 2027. The company also plans to reinvest selling, general and administrative expense savings and portfolio savings in its product-development pipeline and commercial capabilities.

Cash flow and revised assumptions

Third-quarter free cash flow was $331.1 million, up $154 million from the prior-year period. For the first nine months, operating cash flow totaled $430.6 million and free cash flow reached $370.9 million, compared with $183.1 million a year earlier.

Net debt declined to about $2.1 billion from $2.3 billion in the second quarter, while the net debt-to-EBITDA ratio before charges and gains improved to 2.5 times from 2.7 times. Fortune Brands said it remains committed to reducing that ratio below 2.5 times in the near term.

The company narrowed its full-year free-cash-flow forecast to $380 million to $410 million from $370 million to $420 million. Expected operating cash flow was reduced to $480 million to $500 million from $495 million to $530 million, while planned capital spending was lowered to $90 million to $100 million from $110 million to $125 million.

Fortune Brands continues to assume a low-single-digit decline in both its global market and the U.S. repair-and-remodel market. It now expects U.S. single-family new construction to decline by a mid- to high-single-digit percentage, compared with its previous assumption for a mid-single-digit decline.

The company identified continued exposure to North American and Chinese housing and home-improvement activity, interest rates, inflation, commodity and freight costs, tariffs, supply-chain execution and customer concentration among its principal uncertainties. Execution risks also remain around the turnaround, leadership changes, portfolio transactions and efforts to restore service levels and improve operating efficiency.