Helen of Troy, Ltd. reported earnings and sales were down in the first quarter ended May 31 due in part to the bankruptcy of Bed, Bath and Beyond, but topped analyst expectations, and the company reiterated its full-year guidance. Sales at its Home & Outdoor segment, including OXO, Hydro Flask and Osprey, were down 7.3 percent in the period.
Adjusted EPS of $1.94 was down from $2.41 a year ago but ahead of Wall Street’s consensus of $1.68. Sales fell 6.6 percent to $474.7 million but was above Wall Street’s consensus of $465.4 million.
During the fourth quarter of fiscal 2023, the company made changes to the structure of the organization as part of its global restructuring plan, Project Pegasus. As a result of these changes, the disclosures included herein reflect two reportable segments, Home & Outdoor and Beauty & Wellness. The previous Health & Wellness and Beauty operating segments have been combined into a single reportable segment and include Vicks, Braun, Honeywell, PUR, Hot Tools, and Drybar.
Executive Summary for First Quarter of Fiscal 2024 Compared to Fiscal 2023
- Consolidated net sales revenue of $474.7 million, a decrease of 6.6 percent;
- Gross profit margin improvement of 380 basis points to 45.4 percent compared to 41.6 percent;
- Operating margin of 8.6 percent compared to 6.7 percent;
- Adjusted operating margin of 13.9 percent compared to 13.6 percent;
- Adjusted operating income decreased 4.6 percent to $66.2 million, or 13.9 percent of net sales revenue. The 30 basis point increase in adjusted operating margin was primarily driven by a more favorable product mix within Beauty & Wellness reflecting the benefits of SKU rationalization, a more favorable customer mix within Home & Outdoor, and lower inbound freight costs. These factors were partially offset by higher inventory obsolescence expense, increased annual incentive compensation expense, an increase in outbound freight costs, and unfavorable operating leverage;
- Adjusted income decreased 19.8 percent to $46.7 million. Adjusted diluted EPS decreased 19.5 percent to $1.94 compared to $2.41. The decrease in adjusted diluted EPS was primarily due to higher interest expense and lower adjusted operating income in Home & Outdoor;
- GAAP diluted EPS of 94 cents compared to $1.02;
- Non-GAAP adjusted diluted EPS of $1.94 compared to $2.41;
- Net cash provided by operating activities of $121.1 million compared to net cash used by operating activities of $38.4 million; and
- Non-GAAP adjusted EBITDA margin of 15.2 percent compared to 14.9 percent.
Julien R. Mininberg the CEO of Helen of Troy, stated, “I am pleased to report that first quarter financial performance exceeded our expectations despite continued pressure on certain categories from lower consumer demand and shifting buying patterns. Several Leadership Brands outperformed and also grew market share in the United States. International sales also outperformed during the quarter as our strategic choice to double down on International continues to pay off.
Home & Outdoor net sales revenue decreased $17.1 million, or 7.3 percent, to $217.1 million, compared to $234.3 million. The decrease was driven by a decline from the Organic business of $16.8 million, or 7.2 percent, primarily due to a decline in the insulated beverage category and lower houseware sales due to a reduction in club channel programs and the impact of the Bed, Bath & Beyond bankruptcy. These factors were partially offset by an increase in online channel sales reflecting improved retailer replenishment orders and stronger consumer demand for travel-related products in the outdoor category.
Home & Outdoor operating income was $22.1 million, or 10.2 percent of segment net sales revenue, compared to $29.8 million, or 12.7 percent of segment net sales revenue. The 250 basis point decrease in segment operating margin was primarily due to a charge of $3.1 million related to the bankruptcy of Bed, Bath & Beyond, restructuring charges of $2.8 million, higher distribution expense, increased marketing expense, higher inventory obsolescence expense, an increase in outbound freight costs, and unfavorable operating leverage. These factors were partially offset by lower share-based compensation expense, a more favorable customer mix and lower inbound freight costs. Adjusted operating income decreased 8.9 percent to $34.3 million, or 15.8 percent of segment net sales revenue, compared to $37.6 million, or 16.1 percent of segment net sales revenue.
The company previously announced a global restructuring plan intended to expand operating margins through initiatives designed to improve efficiency and reduce costs, collectively referred to as “Project Pegasus”. Project Pegasus includes multiple workstreams to further optimize the company’s brand portfolio, streamline and simplify the organization, accelerate the cost of goods savings projects, enhance the efficiency of its supply chain network, optimize its indirect spending, and improve its cash flow and working capital, as well as other activities. The company anticipates these initiatives will create operating efficiencies, as well as provide a platform to fund future growth investments.
The company continues to have the following expectations regarding Project Pegasus:
- Targeted annualized pre-tax operating profit improvements of approximately $75 million to $85 million, which the company expects to substantially begin in fiscal 2024 and be substantially achieved by the end of fiscal 2026;
- Estimated cadence of the recognition of the savings will be approximately 25 percent in fiscal 2024, approximately 50 percent in fiscal 2025 and approximately 25 percent in fiscal 2026;
- Total profit improvements are to be realized approximately 60 percent through reduced cost of goods sold and 40 percent through lower SG&A;
- Total one-time pre-tax restructuring charges of approximately $85 million to $95 million over the duration of the plan, which are expected to be substantially completed by the end of fiscal 2024 and will primarily be comprised of severance and employee-related costs, professional fees, contract termination costs, and other exit and disposal costs; and
- All of the company’s operating segments and shared services will be impacted by the plan.
The company continues to expect consolidated net sales revenue in the range of $1.965 billion to $2.015 billion, which implies a decline of 5.2 percent to 2.8 percent. This continues to include a year-over-year decline of $35 million, or 1.7 percent, from the removal of Bed, Bath & Beyond revenue from the outlook, and a similar-sized reduction from the Pegasus SKU rationalization initiative. The company’s sales outlook reflects what it believes will be a continued slower economy and uncertainty in spending patterns, especially for some discretionary categories. The company has seen some reduction of trade inventory on a sequential basis as many key retailers have lowered their inventory on hand and expects that sell-in will more closely match sell-through in fiscal 2024.
The company’s fiscal year net sales outlook reflects the following expectations by segment—Home & Outdoor net sales decline 1.7 percent to a growth of 1.0 percent and Beauty & Wellness net sales declined 8.0 percent to 5.8 percent.
The company expects GAAP diluted EPS of $3.81 to $4.67 and non-GAAP adjusted diluted EPS in the range of $8.50 to $9.00, which implies an adjusted diluted EPS decline of 10.1 percent to 4.8 percent. This continues to reflect additional year-over-year expense from the restoration of annual incentive compensation expense to target levels, as well as higher interest and depreciation expense, totaling approximately $1.79, net of tax.
The company expects consolidated adjusted EBITDA of $338 million to $348 million, which implies growth of 3.2 percent to 6.3 percent. Free cash flow is expected to be $250 million to $270 million. The company’s net leverage ratio, as defined in its credit agreement, is expected to end fiscal 2024 at 2.0x to 1.85x.
In terms of the quarterly cadence of sales and adjusted diluted EPS, the company continues to expect the majority of its net sales growth to be concentrated in the third quarter of fiscal 2024 and adjusted diluted EPS growth to be concentrated in the third and fourth quarters of fiscal 2024. The company expects a decline in net sales of approximately 8 percent to 6 percent in the second quarter of fiscal 2024. The company also expects to realize the benefits of debt deleveraging and lower inbound freight and product costs more fully in the second half of the year. Accordingly, the company expects a decline in adjusted diluted EPS of approximately 20 percent to 30 percent in the first half of fiscal 2024, with near offsetting growth in the second half of the year.
Photo courtesy Hydro Flask