By Eric Smith
The strong performance from Hydro Flask in the second quarter was a pleasant surprise for Helen of Troy Ltd. executives, who worried revenue would be diminished after a number of customer orders had been accelerated into Q1 in advance of the recent enterprise resource planning (ERP) integration.
But Hydro Flask’s customer order replenishment in Q2 was in line with the previous sell-through, meaning the brand was able to withstand the sales anomaly and deliver a strong quarter.
That growth helped bolster Helen of Troy’s housewares segment, with net sales increasing 19.4 percent and adjusted operating margin remaining steady at 22.4 percent, which proved to be a bright spot for the parent company’s second quarter.
“Business fundamentals and our execution remain strong as OXO and Hydro Flask each posted healthy growth during the quarter and continue to win with consumers and customers online and in brick-and-mortar,” Julien Mininberg, Helen of Troy’s CEO, said on Tuesday morning’s earnings call with analysts.
Mininberg had warned analysts on the previous quarter’s earnings call that Hydro Flask might not be able to sustain the impressive and consecutive growth it had been experiencing. But not only did customer orders replenish handily, the brand even gained some share, Mininberg said.
“Hydro Flask’s No. 1 share position continues to expand, picking up additional share points in the quarter as well as over the past year,” he said.
Companywide, revenue increased 14.1 percent to $393.6 million, which beat Wall Street’s consensus estimate by $44.4 million. Earnings per share of $1.98 topped expectations by 39 cents.
Strong brick-and-mortar sales in Helen of Troy’s housewares and health and home segments, in addition to growth in online sales and growth in international sales, were partially offset by lower brick-and-mortar sales and the rationalization of certain brands and products in its beauty segment along with unfavorable impact from foreign currency fluctuations of approximately $0.3 million, or 0.1 percent.
Despite the second quarter revenue and EPS beat, however, tariffs on Chinese-made products remain a concern for Helen of Troy, which is now seeking countermeasures as costs rise.
“The second half of the year is not without its challenges, including rising input costs and the adverse impact of tariffs,” Mininberg said.
The company expects the unmitigated tariff impact on fiscal 2019 to be approximately $5 million to $5.5 million, CFO Brian Grass said on Tuesday’s earnings call.
“This estimate assumes no mitigating pricing or sourcing actions on our part and is likely subject to change as events continue to develop,” Grass said. “Of course, we’re exploring all options available to us to reduce the impact of the tariff changes and commodity and freight pressures. While we anticipate achieving our fiscal 2019 revised full-year outlook, the current trade environment is certainly a concern and could provide a meaningful headwind next fiscal year if we ultimately realize the full-year impact of tariff changes in their current form.”
When asked about specific ways to mitigate the impact of tariffs, Grass said the company would prefer to enact sourcing changes rather than pass along price increases to its customers.
“We’ll do the price increases where we absolutely need to, but sourcing changes first,” Grass said. “Sourcing changes can be easier, more short-term changes, and then there are also ones that are harder to do and more structural and more long-term in nature that take a longer period of time to get in place. We’ve already—on the affected items—gone through both types of sourcing changes, evaluated those, and put into place what we think makes sense.”
The company said it will look at moving some sourcing to Mexico or Eastern Europe, and even elsewhere in China, which might still have the tariff impact but can offer reductions in other sourcing costs. All that being said, Helen of Troy executive cautioned that moving production to another location “takes time to amp it up and to ramp correctly,” Mininberg said.
“It’s not easy to change sourcing and still have the same quality and capacity,” he said. “There’s a level of know-how, relationships … capital investment in automation, quality assurance systems, subcomponent supplier input. There are all kinds of things that go into the sourcing supply chain that you don’t just pick up and move from one day to the next. Infrastructure around extremely well-established products like humidifiers are hard to build, so it’s important to respect those supply chains. So, we don’t move them lightly and we’re very careful.”
Despite the impact of tariffs (look for more on this next quarter) and because of a surprisingly strong Q2 from Hydro Flask, Helen of Troy executives significantly increased their outlook for housewares’ growth for the year. The company updated the company’s sales outlook for housewares to a net sales growth of 11 percent from the previous projection of 9 percent.
For fiscal 2019, the company increased its overall outlook for consolidated net sales. Helen of Troy now projects revenue to be in the range of $1.535 to $1.560 billion, which implies consolidated sales growth of 3.8 percent to 5.5 percent. Previously, the range was $1.485 to $1.510 billion, implying a consolidated sales growth of 0.4 percent to 2.1 percent.
The company also increased EPS outlook. The company expects consolidated GAAP diluted EPS from continuing operations to be in the range of $6.31 to $6.46 and non-GAAP adjusted diluted EPS from continuing operations to be in the range of $7.65 to $7.90. These figures are up from the ranges of $6.27 to $6.42 and $7.45 to $7.70, respectively.
“We believe we are well positioned to achieve our new, upwardly revised full-year objectives and set the stage for further progress thereafter,” Mininberg said. “We continue to see opportunity across all of our strategies, including M&A. We have solid financial flexibility that allows us to deploy capital toward accretive acquisitions and potential further share repurchases. I believe the best is yet to come for Helen of Troy.”
Photo courtesy Hydro Flask