Helen of Troy (HELE) Up 13.9% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Helen of Troy (HELE). Shares have added about 13.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Helen of Troy due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Helen of Troy Q4 Earnings & Sales Rise Y/Y

Helen of Troy Limited released impressive fourth-quarter fiscal 2020 results, wherein both top and bottom lines increased year over year. Results gained from double-digit growth in all three business segments. Further, continued strength in the flywheel program in fiscal 2020 and the successful completion of the first year of Phase II of Helen of Troy’s Transformation plan contributed to results. Moreover, the company witnessed a robust trend in sales of key Helen of Troy brands, such as Braun, Vicks, PUR, Honeywell and OXO, after the implementation of lockdown in March. Additionally, an increase in demand for thermometers, humidifiers, air purifiers, water purifiers as well as OXO kitchen, cleaning and storage products have aided sales. Also, it is looking forward to investing in Phase II of its transformation initiative, once the COVID-19 situation resumes to normalcy.

Results in Detail

Adjusted earnings from continuing operations improved 3.3% year over year to $1.88 per share. Higher adjusted operating income and the favorable impact of lower weighted average diluted shares outstanding were primary drivers. On the flip side, elevated interest costs remained a drag.

Net sales rose 14.9% year over year to $442.4 million. The upside was driven by 13.4% organic sales growth and 1.6% gains from the acquisition of Drybar Products. Notably, organic sales growth was supported by improved brick and mortar appliance sales in the Beauty division, solid sales in core channels of the Housewares unit and strong demand in the Health & Home segment owing to increased sales of thermometers due to the ongoing COVID-19 situation. These were offset by sluggishness in the personal care business under the Beauty segment.

Consolidated gross margin expanded 260 percentage points to 43.5%, courtesy of a higher mix of Housewares sales, favorable product mix in all three segments and smaller mix of shipments on a direct import basis. This was partly countered by a reduced mix of personal care sales in the Beauty segment. Adjusted operating income inched up 0.8% to $53.9 million, while adjusted operating margin contracted 170 percentage points to 12.2%. This downside mainly resulted from higher costs related to advertising and new product development along with a rise in royalty expenses and performance-based annual incentive compensation.

Segmental Performance

Net sales in the Housewares segment rose 15% to $144.9 million, courtesy of growth in point-of-sale for brick and mortar customers, higher online sales and gains from new product launches. These positives were somewhat offset by lower international, club channel and closeout channel sales. Adjusted operating income in the unit declined 24.8% and the adjusted operating margin contracted 630 basis points (bps) to 11.8%.

Net sales in the Health & Home segment advanced 10.5% to $185.9 million, driven by new product launches and improved demand in products related to higher pediatric fever and COVID-19. These factors were partially offset by an unfavorable currency movement of nearly 0.3% as well as a decline in sales from distribution changes. Adjusted operating income fell 2.3%, while adjusted operating margin contracted 140 bps to 11.2%.

Sales in the Beauty segment improved 23.1% to $111.6 million, owing to solid organic sales growth and contributions from the buyout of Drybar Products. The upside was countered by softness in the personal care business. Adjusted operating income surged 69.5% and adjusted operating margin expanded 400 bps to 14.4%.

Other Financial Details

The company ended fiscal 2020 with cash and cash equivalents of $24.5 million and total debt of $339.3 million. Net cash from operating activities came in at $271.3 million.

Measures in the Wake of COVID-19

Given the unprecedented impacts of COVID-19, management has decided to withhold its fiscal 2021 guidance. Also, the company has undertaken several efforts, including cutting costs and strengthening cash balance amid the pandemic. Alongside these, some other notable preventive measures have been implemented and will remain valid until retail stores reopen and consumer spending resumes. Notably, all associates and executive leadership team members will take a salary cut while board members will have to forgo their cash compensation. Further, merit-based hikes, promotions and new recruitments have been suspended until further notice. It is also furloughing associates in specific areas, lowering working hours and reducing external temporary labor. Management is cutting down on marketing expenses and investments in key categories and new product launches to focus on products, which are currently in high demand.

Moving on, the company is focused on divesting certain assets within its personal care business by fiscal 2021. From now on, these assets will be referred to as Non-Core while its ongoing operations will be called Core. Further, the company’s debt load appears too high when compared with cash and cash equivalents of $1,000.3 million as of Feb 29, 2020.

How Have Estimates Been Moving Since Then?

Estimates revision followed a downward path over the past two months.

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