Helen of Troy Ltd. reported housewares net sales revenue increased 37.7 percent in the fiscal first quarter ended May 31, to $193.6 million, compared to $140.6 million a year ago.
Growth was driven by an Organic business increase of $52.1 million, or 37.1 percent, primarily due to an increase in brick and mortar sales for both OXO and Hydro Flask due to the favorable comparative impact of store closures and reduced store traffic in the prior-year period, growth in international sales, higher sales in the club and closeout channels, and the favorable impact of orders that were not able to be shipped at the end of the fourth quarter of fiscal 2021 due to Winter Storm Uri. These factors were partially offset by a decrease in online sales due to the unfavorable comparative impact of an even greater shift to online shopping in the prior-year period due to store closures. Net sales revenue in the housewares segment was also favorably impacted by net foreign currency fluctuations of approximately $0.9 million, or 0.6 percent.
Operating income in the housewares segment was $27.1 million, or 14.0 percent of segment net sales revenue, compared to $23.2 million, or 16.5 percent of segment net sales revenue. The 2.5 percentage point decrease in segment operating margin was primarily due to a less favorable channel mix, higher inbound freight expense, higher distribution costs, an increase in marketing expense, and higher personnel expense. These factors were partially offset by lower bad debt expense and favorable operating leverage. Adjusted operating income increased 21.3 percent to $33.2 million, or 17.2 percent of segment net sales revenue compared to $27.4 million, or 19.5 percent of segment net sales revenue.
Companywide Sales Increase 29 Percent
Companywide, consolidated net sales revenue increased $120.4 million, or 28.6 percent, to $541.2 million compared to $420.8 million. Wall Street’s consensus estimate had been $438.9 million.
The growth was driven by an Organic business increase of $114.9 million, or 27.3 percent, primarily due to higher consolidated brick and mortar sales in the Beauty and Housewares segments due to the favorable comparative impact of store closures and reduced store traffic in the prior-year period, an increase in consolidated international sales, higher sales in the club and closeout channels, growth in consolidated online sales, and the favorable impact of $15 million of orders that were not able to be shipped at the end of the fourth quarter of fiscal 2021 due to the late-February winter storm in the U.S. (“Winter Storm Uri”). These factors were partially offset by a net sales revenue decline in Non-Core business. Net sales revenue was also favorably impacted by net foreign currency fluctuations of approximately $5.5 million, or 1.3 percent.
Health & Home segment net sales revenue increased $4.1 million, or 2.1 percent, to $204.1 million, compared to $200.0 million. The segment includes Vicks, Braun, Honeywell and PUR. Operating income was $11.2 million, or 5.5 percent of segment net sales revenue, compared to $31.5 million, or 15.8 percent of segment net sales revenue. Adjusted operating income decreased 20.1 percent to $29.8 million, or 14.6 percent of segment net sales revenue, compared to $37.3 million, or 18.7 percent of segment net sales revenue.
Beauty segment net sales revenue increased $63.2 million, or 78.8 percent, to $143.5 million, compared to $80.3 million. The segment includes Pert, Revlon, Hot Tools Professional, Infusium, Brut, Bed Head by Tigi, Sure and Drybar. Operating income was $26.4 million, or 18.4 percent of segment net sales revenue, compared to $2.2 million, or 2.8 percent of segment net sales revenue. Adjusted operating income increased $25.5 million to $31.9 million, or 22.3 percent of segment net sales revenue, compared to $6.4 million, or 8.0 percent of segment net sales revenue.
Consolidated gross profit margin decreased 1.8 percentage points to 40.8 percent, compared to 42.6 percent. The decrease in consolidated gross profit margin was primarily due to higher inbound freight expense due to rising freight costs and container supply shortages, EPA compliance costs in the Health & Home segment of $13.1 million, and a less favorable channel mix in the Housewares segment. These factors were partially offset by a more favorable product mix in the Beauty segment.
Consolidated selling, general and administrative expense (SG&A) ratio decreased 0.2 percentage points to 28.8 percent, compared to 29.0 percent. The decrease in the consolidated SG&A ratio was primarily due to favorable operating leverage, reduced royalty expense as a result of the amendment of the Revlon trademark license, lower amortization expense, and a decrease in bad debt expense. These factors were partially offset by the impact of higher personnel and advertising expenses due to cost reduction initiatives in the prior-year period and higher distribution expenses.
Consolidated operating income was $64.8 million, or 12.0 percent of net sales revenue, compared to $57.0 million, or 13.5 percent of net sales revenue. The decrease in consolidated operating margin was primarily driven by higher inbound freight expense due to rising freight costs and container supply shortages, EPA compliance costs, a less favorable channel mix in the Housewares segment, higher personnel and advertising expenses due to cost reduction initiatives in the prior-year period, and higher distribution expenses. These factors were partially offset by a more favorable product mix in the Beauty segment, favorable operating leverage, reduced royalty expense as a result of the amendment of the Revlon trademark license, lower amortization expense, and a decrease in bad debt expense.
Income tax expense as a percentage of income before tax was 8.0 percent compared to an income tax benefit of 13.0 percent for the same period last year, primarily due to the benefit of the CARES Act in fiscal 2021. Income tax expense for the three months ended May 31, 2021 is driven by the mix of taxable income in the company’s various jurisdictions and tax benefits associated with share-based compensation recognized in the period in which it is settled.
Net income was $57.0 million, compared to $60.3 million. Diluted EPS was $2.31 compared to $2.37. Diluted EPS decreased primarily due to lower operating income in the Health & Home segment and the comparative impact from the CARES Act tax benefit recognized in the prior-year period, partially offset by higher operating income in the Beauty and Housewares segments, lower interest expense, and lower weighted average diluted shares outstanding.
Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) increased 32.7 percent to $100.8 million compared to $76.0 million.
On an adjusted basis for the first quarter of fiscal 2022 and 2021, excluding EPA compliance costs, restructuring charges, tax reform, amortization of intangible assets, and non-cash share-based compensation, adjusted operating income increased 33.6 percent, to $95.0 million, or 17.5 percent of net sales revenue, compared to $71.1 million, or 16.9 percent of net sales revenue. Adjusted income increased 33.7 percent, to $85.8 million, or $3.48 a share. Wall Street’s consensus estimate had been $2.63.
EPA Packaging Compliance Matter
The company is currently in discussions with the EPA regarding the compliance of packaging claims on certain of its products in the air and water filtration and a limited subset of humidifier products within the Health & Home segment that are sold in the United States. The EPA has not raised any product quality, safety or performance issues. The company expects these products to be available for distribution with the only changes being modified labeling or different packaging. As a result of these discussions, on May 27, 2021, the company voluntarily implemented a temporary stop shipment action in the U.S. while it works with the EPA towards an expedient resolution. The EPA has approved modest changes to the company’s labeling claims on its existing water filtration packaging, which the company has begun to implement. The company resumed shipment of these products this week and is actively working towards similar agreements regarding its air filtration and humidification packaging in continued collaboration with the EPA. At the company’s request, the EPA issued a Stop Sale, Use or Removal Order on June 29, 2021, which among other things, allows for the movement of certain of its products among its warehouses and will facilitate rework of the affected air filtration packaging once agreed to with the EPA. The company believes this is meaningful progress towards a final resolution with the EPA. The stop shipment will remain in effect until the company implements an approved labeling and repackaging plan. During the first quarter of fiscal 2022, the company recorded a $13.1 million charge to write off the obsolete packaging for the affected products in inventory on-hand and in-transit as of the end of the first quarter of fiscal 2022. The charge was recognized in cost of goods sold and is referred to as “EPA compliance costs.” The company expects to incur additional EPA compliance costs, which may include costs to relabel or repackage existing inventory as well as incremental freight and storage costs, among other things.
Balance Sheet and Cash Flow Highlights
- Cash and cash equivalents totaled $37.4 million, compared to $88.5 million.
- Accounts receivable turnover was 67.4 days, compared to 67.5 days.
- Inventory was $540.1 million, compared to $276.3 million. Trailing twelve-month inventory turnover was 3.0 times compared to 3.2 times.
- Total short- and long-term debt was $511.0 million, compared to $324.9 million.
- Net cash used by operating activities for the first three months of the fiscal year was $63.4 million, compared to net cash provided of $92.8 million for the same period last year.
On June 7, 2021, the company completed the sale of its Personal Care business, not including the Latin America and Caribbean regions, to HRB Brands LLC for $44.7 million in cash. The sale also includes an option that provides HRB Brands LLC the right to purchase the Latin America and the Caribbean Personal Care businesses no later than the end of fiscal 2022, subject to meeting certain agreed-upon conditions. The carrying amount of the identified assets and liabilities within the disposal group were classified as held for sale as of May 31, 2021. The transaction is not reflected in the company’s condensed consolidated financial statements as of and for the period ended May 31, 2021.
Julien R. Mininberg, chief executive officer, stated: “We delivered an outstanding first quarter, with even higher sales growth and stronger profitability than we expected. The 28.6 percent sales growth was broad-based, with Beauty and Housewares leading the way as re-openings drove store traffic and our brands continued to distinguish themselves from consumers. Health & Home also grew, surpassing the very large COVID-related first quarter base laid down a year ago. International sales grew even faster than the fleet average as this strategic focus area benefited from prior flywheel investments. We grew adjusted EPS by 37.5 percent, as the very strong sales growth more than offset normalized spending versus last year and headwinds from widespread inflation affecting nearly all input costs including materials, labor, and transportation.
“So far in Fiscal 2022, we have continued to take actions intended to drive long-term value for shareholders. We divested our Personal Care business in line with our long-term strategy to focus on our Leadership Brands, finalized a land purchase in Gallaway, Tennessee to build a state-of-the-art distribution center that will have high levels of automation and scalable direct-to-consumer capability, and re-purchased just under 2 percent of our stock. We also secured more inventory ahead of the more recent cost increases in the market, positioning us well to continue to meet demand and better manage the current period of inflation and global supply chain disruption.”
Mininberg continued: “Looking ahead to full fiscal 2022, we are now in a position to provide an outlook. Our Housewares and Beauty segments are each projecting healthy growth in revenue and profitability on top of their strong growth last year. Our projection in Health & Home includes the estimated impact of lost sales volume related to the EPA matter. Our rapid response team is working to bring this to resolution as quickly as possible. Excluding the impact of the EPA matter, we were on track to achieve growth in both Core net sales and Core adjusted EPS, which is in line with the thinking we communicated in April.
Longer-term, we remain committed to our Phase II Transformation Plan and expect to return to our Phase II targets of average annual organic revenue growth of 3 percent and adjusted EPS growth of 8 percent in Fiscal 2023 and Fiscal 2024. We also remain actively focused on acquisition opportunities to further accelerate long-term value creation.”
Fiscal 2022 Annual Outlook
The company expects consolidated net sales revenue in the range of $1.93 to $1.98 billion, which implies a decline of 8.0 percent to 5.5 percent. The company expects Core net sales revenue in the range of $1.9 to $1.95 billion, which implies a decline of 6.0 percent to 3.5 percent, which includes 6.7 percent to 5.4 percent of unfavorable impact related to the EPA matter.
The company’s net sales outlook reflects the following expectations by segment:
- Housewares net sales growth of 7.0 percent to 9.0 percent;
- Health & Home net sales decline of 27.0 percent to 24.0 percent, including 15.2 percent to 12.4 percent of decline related to the EPA matter; and
- Beauty net sales growth of 4.2 percent to 6.3 percent; Beauty Core net sales growth of 17.0 percent to 19.0 percent.
The company expects consolidated GAAP diluted EPS of $6.80 to $7.49 and Core diluted EPS of $6.60 to $7.28. The company expects consolidated non-GAAP adjusted diluted EPS in the range of $10.46 to $10.97 and Core adjusted diluted EPS in the range of $10.25 to $10.75, which excludes any EPA compliance costs, asset impairment charges, restructuring charges, tax reform, share-based compensation expense and intangible asset amortization expense. The company’s Core adjusted diluted EPS outlook implies a decline of 7.0 percent to 2.5 percent, which includes 9.1 percent to 6.3 percent of impact due to the EPA matter, implying year-over-year growth of 2.1 percent to 3.8 percent not including the impact of the EPA matter.
Photo courtesy Helen of Troy