Energizer Holdings Inc. (ENR) reported second-quarter fiscal 2014 non-GAAP earnings of $1.88 per share, which convincingly beat the Zacks Consensus Estimate of $1.73 per share.
Also, earnings increased 4.5% from $1.80 reported in the year-ago quarter. The year- over-year increase was primarily on account of incremental benefit from the feminine care brand acquisition, cost savings from restructuring, strong margins, and the timing of advertising & promotion (A&P) spend.
Following the announcement of the spin-off coupled with the release of the second quarter earnings, Energizer’s shares were up 8.0% year-to-date. On a yearly basis, it has risen 16.7%.
Revenues declined 3.1% from the year-ago quarter to $1.06 billion and missed the Zacks Consensus Estimate of $1.08 billion too.
The year-over-year decline in revenues was primarily due to customer losses in the Household Products segment, unfavorable foreign currency rates, pricing controls and import restrictions in certain Latin American countries, soft category dynamics and increased competitive pressures across both segments.
Incremental sales from the feminine care brands, acquired in Oct 2013, provided a partial offset to the aforementioned shortfalls.
Revenues from the Personal Care segment increased 5.6% from the year-ago quarter to $689.0 million in the reported quarter mainly due to pricing gains. Household Products revenues declined 15.8% from the year-ago quarter to $373.4 million.
Gross margin for the quarter was down 120 basis points (bps) to 45.9% from 47.1% reported in the year-ago quarter. Gross margin declined as the decline in revenues was greater than the decline in cost of goods sold (COGS).
Year over year, selling, general & administrative expense declined 4.6% and research & development expense declined 8.5%, primarily due to cost controls and restructuring initiatives.
Advertising and sales promotion expense decreased 5.3% on a year-over-year basis. The decreased spending was a result of the timing of promotion and innovation launch activity compared to the prior year. Energizer remains committed to investing at its full year planned levels.
Adjusted net income was $118.0 million in comparison to $113.6 million reported in the year ago quarter.
Dividend payments in the quarter were approximately $31.0 million, or $0.50 per share, compared with $25.0 million, or 40 cents per share, in the prior-year quarter. Share repurchases totaled approximately 1 million shares in the quarter at a cost of $94 million.
The company continues to invest in developing new and improved products. The Personal Care segment’s new product pipeline for 2014 comprises Hydro Thermer [ph], hydro-sensitive formulations, and Playtex Sport Fresh Balance. In Sun Care, the company continues to invest in the Banana Boat Protect & Hydrate platform and Hawaiian Tropic Silk Hydration as well as other product expansions.
2013 Restructuring Project
Restructuring savings in the quarter increased approximately $50.0 million versus the prior year quarter. The primary impacts of savings were reflected in improved gross margin in Household Products and lower overhead expenses. Project-to-date savings are estimated to be over $190 million.
For the fiscal year, the company estimates gross savings to increase approximately $100 to $125 million versus the prior year. As a result, the estimated cumulative total project gross savings are expected to be in the range of $200 to $225 million at the end of fiscal 2014.
The company expects total project gross savings to be approximately $300 million. The incremental savings are expected to be realized throughout fiscal 2015 and 2016 and the total run rate impact is expected to be realized in fiscal 2016.
On Apr 30, 2014, Energizer announced its intention to separate the company’s Household Products and Personal Care divisions into two independent, publicly traded companies. The spin-off is planned as a tax-free spin-off to the company's shareholders and is expected to be completed in the second half of fiscal 2015.
Energizer believes that creating two public companies offers a number of benefits to the standalone businesses. Following the separation, each standalone company will be able to focus on its distinct commercial priorities and allocate its own resources to meet the needs of its business.
Household Products, with batteries and portable lighting products, is expected to generate strong margins and significant cash flows going forward. The Household Products division reported annual revenue of approximately $1.9 billion in the trailing twelve month period ended Mar 31, 2014.
Personal Care, on the other hand, is expected to be a leading pure-play consumer products company with an attractive stable of well-established brand names. The Personal Care division had annual revenue of approximately $2.6 billion in the trailing twelve month period ended Mar 31, 2014, adjusted on a pro-forma basis for the feminine care acquisition.
Energizer expects fiscal 2014 adjusted earnings to be in the range of $7.00 to $7.25 per share while the Zacks Consensus Estimate for the same is pegged at $7.11 per share.
The company estimates incremental restructuring savings to be in the range of $100 million to $125 million. This is an increase over the previously estimated figure of $ 100 million and a reflection of the progress Energizer continues to make with its initiatives.
A&P, as a percentage of sales, is expected to be in the range of 10.5% to 11.0%. Unfavorable foreign currency impact is expected to be between $45.0 million and $50.0 million, pretax based on recent rates.
Energizer reported a mixed second quarter fiscal 2014, with earnings per share beating the Zacks Consensus Estimate and revenues missing the same. Energizer believes that its results were negatively impacted by unfavorable global currencies, pricing controls and import restrictions in certain Latin American countries.
We believe that product innovations coupled with higher pricing of Energizer’s household products and restructuring initiatives would positively impact its results, going forward.
Moreover, its prudent product mix would expand margins in the near term. Also, the company’s partnership with Unilever’s (UN - Analyst Report) AXE brand is expected to result in market share gains, going forward. This apart, the acquisition strategy of the company is expected to reap benefits.
However, the expected declines in volumes in Household Product segment, unfavorable foreign exchange and increasing competition from companies such as Kimberley-Clark Corp. (KMB - Analyst Report) and Procter & Gamble Co. (PG - Analyst Report) are the near-term headwinds.
Currently, Energizer carries a Zacks Rank #3 (Hold).