Shares of Newell Brands Inc. rose 14.5 percent Friday after the consumer-goods conglomerate reported adjusted earnings in the third quarter exceeded expectations as its turnaround efforts made some progress. The full-year EPS outlook was lifted for the year. Coleman’s sales were impacted by lost distribution at a key U.S. retailer.

The stock’s uptick came despite the company showing a whopping net loss of $7.1 billion, or $15.10 a share, in the quarter after absorbing an $8.1 billion impairment charge from continuing operations primarily associated with intangible assets in certain acquired businesses in each of its reporting segments.

The majority of the charge reflects the impact of the decline in the company’s market capitalization. It partly reflects the latest cash flow projections associated with recently-acquired businesses.

Shares of Newell were up $2.40 to $18.95 Friday but are well off from $30.90 level at the start of the year. The stock had been as high as $55.00 in June 2017.

“’The majority of the charge is dictated by the third and fourth quarter pullback in the stock price,” said Michael Polk, Newell’s president and CEO, on a conference call with analysts. “Clearly, our performance on certain businesses from both legacy companies contributed as well. While the volatility in our environment over the last year has been unprecedented, we acknowledged the need to change our approach to reflect the new set of circumstances through the Accelerated Transformation Plan launched in January.”

Newell has repeatedly missed sales goals and lost billions of dollars of market value after embarking on a failed acquisition spree that included a $15 billion deal to buy Jarden Corp. in 2016. The Jarden acquisition gave Newell a number of major brands in the active pace, including Coleman, Marmot, Pure Fishing and Rawlings. The company earlier this year announced a restructuring program to shed about a third of what it considers non-core businesses.

Excluding non-recurring items, “normalized” earnings in the quarter were down 8.8 percent to $384 million, or 81 cents per share, compared with $421 million, or 86 cents, in the prior year but well ahead of Wall Street’s target of 65 cents.

Net sales from continuing operations were down 7.7 percent to $2.28 billion. The decline reflects a $61 million headwind from the adoption of the new 2018 revenue recognition standard, unfavorable foreign exchange and a decline in core sales. Sales were short of Wall Street’s target of $2.35 billion. Core sales from continuing operations declined 4.0 percent.

Polk noted that over the last few quarters, the company has been hit by a number of external factors, including the Toys “R” Us bankruptcy, changes in the writing retailer landscape, the U.S. trade conflict as well as FX headwinds.

But he also said the company is making progress five key areas driving its Accelerated Transformation Plan: strengthening operational performance, optimizing cost structure, increasing cash efficiency, executing the divestitures and reallocating capital to delever and repurchase shares, and rightsizing and strengthening the organization.

“Specifically we delivered sequential improvement in core sales growth in all segments and all regions with the writing returning to growth in e-commerce excluding the absence of Toys “R” Us US Baby registry growing double-digits,” said Polk. “We delivered 13 percent normalized operating margins, exceeding our expectations and year ago performance, despite increased inflation, the July round of tariffs and the negative impact of foreign exchange.”

Newell also completed the divestiture of Rawlings and Waddington late in the second quarter with the proceeds helping pay down nearly $900 million in debt.

He added, “While we know we have much more work to do, third quarter was one of sequential progress. We will continue to execute with a sense of urgency and repositioning Newell Brands for sustainable growth.”

Reported gross margin in the quarter was 35.9 percent compared with 35.1 percent in the prior year, resulting from better pricing, productivity, lower integration and restructuring costs and the impact of the new revenue recognition standard, which more than offset the impact of foreign exchange, inflation related to tariffs and higher input costs and other manufacturing costs associated with inventory reduction. Normalized gross margin was 35.7 percent compared with 35.8 percent in the prior year.

Normalized operating income was $296 million compared with $319 million in the prior year. Normalized operating margin was 13.0 percent compared to 12.9 percent in the prior year.

In The Home & Outdoor Living segment, sales were down 6.8 percent to $727 million compared. The decline was largely driven by lost distribution for Coleman at a key U.S. retailer and weaknesses in home fragrance in EMEA and Yankee retail stores. These outcomes were partially offset by growth from Connected Home & Security and the Home Fragrance U.S. wholesale business.

The Home & Outdoor Living segment’s major brands includes Chesapeake Bay Candle, Coleman, Contigo, Ex Officio, First Alert, Marmot, WoodWick and Yankee Candle.

Newell said it expects core sales trends in the Home & Outdoor Living to improve sequentially in the fourth quarter related to continued strong growth on Connected Home & Security and improved performance on Home Fragrance driven by growth in the U.S. wholesale channel and stabilization in Europe.

The reported operating loss for the Home & Outdoor Living was $4.3 billion compared with operating income of $95.5 million in the prior year, reflecting the impairment charges. Normalized operating income was $83.0 million, or 11.4 percent of sales, down 25.2 percent from $111 million, 14.2 percent of sales, in the prior year.

Among its other segments, the Food & Appliances segment’s sales dropped 11.4 percent to $722 million, reflecting the new revenue recognition standard, foreign exchange and continuing challenges on appliances related to lost distribution at a key U.S. retailer, which more than offset improved results from Food. Core sales trends are expected to improve sequentially in the fourth quarter related to new product launches on Appliances and Cookware.

The segment includes Ball, Calphalon, Crock-Pot, FoodSaver, Mr. Coffee, Oster, Rubbermaid, Sistema and Sunbeam.

The reported operating loss in the Food & Appliances segment was $3.3 billion compared with operating income of $105 million in the prior year due to impairment charges. Normalized operating income was $96.9 million versus $122 million last year.

The Learning & Development segment’s sales dipped 3.9 percent to $829 million. A return to core sales growth in the Writing business was more than offset by the impact of the new 2018 revenue recognition standard, unfavorable currency and a decline in core sales for Baby due to the Toys “R” Us bankruptcy. The segment is expected to return to growth in the fourth quarter related to further strengthening in Writing and continued progress on Baby.

Reported operating loss for the Learning & Development segment was $159 million compared with operating income of $109 million in the prior year, primarily attributable to impairment charges. Normalized operating income was $195 million versus $142 million last year. The Learning & Development segment’s major brands include Aprica, Baby Jogger, Dymo, Elmer’s, Expo, Graco, Mr. Sketch, NUK, Paper Mate, Parker, Prismacolor, Sharpie, Tigex, Waterman and X-Acto.

Polk noted that since announcing the Accelerated Transformation Plan on January 25, Newell Brands has made substantial progress in achieving improved operational performance, divesting non-core businesses, deleveraging the balance sheet and returning cash to shareholders, while simultaneously moving toward a simpler, stronger and faster company.

Key achievements of the plan year-to-date include:

  • Closing three transactions (The Waddington Group, Rawlings Sporting Goods Company and Goody Products), which account for $2.6 billion of after-tax proceeds;
  • Right-sizing the cost structure and adapting organizational design to a smaller company footprint, with actions taken in the second and third quarters yielding an approximately 10 percent reduction in professional headcount on the continuing businesses;
  • Allocating divestiture proceeds toward debt paydown and share repurchase:
  • Debt paydown – net debt exiting the third quarter $2.5 billion lower than prior year,
  • Share repurchases of $511 million in the third quarter.

As part of the plan, the company plans to divest non-core businesses representing approximately 35 percent of the company’s net sales. Those businesses, now listed as discontinued operations, include Jostens, Pure Fishing, Rubbermaid Commercial Products, Mapa/Spontex/Quickie, The Waddington Group, Process Solutions, Rawlings, Goody, Rubbermaid Outdoor/Closet/Refuse & Garage and U.S. Playing Cards.

Discontinued operations reported a $317 million net loss, including a $517 million impairment charge, in the third quarter versus net income of $123 million in the year-ago period. Normalized diluted earnings per share from discontinued operations were 27 cents compared with 32 cents in the prior year.

Polk said Newell still expects to complete the remaining divestitures by the end of the second quarter of 2019 and still expects to realize proceeds of $10 billion from the sales.

“As you know, we have three processes coming down the homestretch,” said Polk. “We’ve got Jostens under way, we’ve got Pure Fishing under way, we’ve got the US playing cards business under way. And we are just gearing up on the next round of divestitures”.”

The company reaffirmed its 2018 full year outlook for net sales of $8.7 billion to $9.0 billion and operating cash flow of $900 million to $1.2 billion. The company increased 2018 full year outlook for normalized earnings per share by 10 cents to $2.55 to $2.75 per share, driven by discrete tax benefits.

Image courtesy Coleman