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Why Is HRG (SPB) Down 11% Since Last Earnings Report?

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It has been about a month since the last earnings report for Spectrum Brands (SPB - Free Report) . Shares have lost about 11% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is HRG due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Spectrum Brands Q1 Earnings & Sales Miss Estimates

Spectrum Brands Holdings posted lower-than-expected top and bottom-line results for first-quarter fiscal 2020. Moreover, both metrics declined year over year.

Adjusted earnings from continuing operations of 20 cents per share lagged the Zacks Consensus Estimate of 35 cents. The bottom line also declined 4.4%, owing to high tariffs as well as rise in manufacturing and stranded costs, partly offset by fall in interest expenses and shares outstanding.

Spectrum Brands’ net sales decreased 1% year over year to $872 million, missing the Zacks Consensus Estimate of $896 million. Excluding the negative impacts of currency; organic net sales edged down 0.3%, owing to lower sales in Home & Garden, and Hardware & Home Improvement segments. This was somewhat offset by higher sales at Home & Personal Care, and Global Pet Care.

Gross profit dipped 12% year over year to $269.1 million. Moreover, gross margin contracted 380 bps to 30.9%, mainly driven by rise in tariffs and restructuring costs related to Global Productivity Improvement Plan, accelerated depreciation, and unfavorable timing of capitalized manufacturing variances. However, the decline was partly offset by favorable pricing and productivity.

Furthermore, the company reported operating loss of $45.9 million against operating income of $25.2 million in the year-ago period.

Adjusted EBITDA from continuing operations declined 11.4% to $102.2 million in the fiscal first quarter. Further, adjusted EBITDA margin contracted 140 bps on high tariffs along with rise in manufacturing and stranded costs. This was partly mitigated by favorable pricing and productivity.

Segmental Performance

Sales at the Hardware & Home Improvement segment fell 2.4% to $297.7 million mainly due to a decline in residential security and builders’ hardware, offset by an increase in plumbing. The segment’s organic sales dipped 2.5% year over year. Also, adjusted EBITDA at the segment grew 23% to $42.8 million.

Sales at the Home & Personal Care segment inched up 1.5% to $322.1 million, backed by growth at personal care and small appliances in Europe. However, fell at the U.S. personal care and small appliances witnessed sales decline along with decreases in department store and specialty channels. Excluding the adverse impacts of foreign currency, organic net sales for the segment increased 3.2%. Moreover, the segment’s adjusted EBITDA of $36.4 million improved 4% on productivity improvements and higher volumes.

The Global Pet Care segment’s sales grew 0.5% year over year to $205.8 million, primarily driven by robust growth in U.S. companion animal revenues as well as higher sales in Europe aquatics and companion animal. This was partly compensated with a decline in U.S. aquatics. Excluding the adverse impacts of foreign currency, organic sales rose 1.1%. Further, the segment’s adjusted EBITDA grew 8.2% to $31.5 million.

The Home & Garden segment’s sales dropped 13.9% to $45.9 million mainly on lower sales in household insect controls and repellents. This was somewhat compensated with growth in outdoor controls. Further, the segment’s adjusted EBITDA fell to a loss of $3.3 million against $3.1 million gain reported in the prior-year quarter.

Other Financials

Spectrum Brands ended the quarter with cash and cash equivalents of $142.2 million, and roughly $678 million available under its $800-million Cash Flow Revolver. As of Dec 29, 2019, the company’s outstanding debt was nearly $2,369 million. It repurchased 1.3 million shares worth $81.4 million as part of its $125-million accelerated share repurchase program. In the reported quarter, capital expenditure was $18.7 million.

Business Development

The company entered an agreement to divest its dog and cat food manufacturing operations in Coevorden, The Netherlands. The move is part of Spectrum Brand’s plans to exit its underperforming businesses to focus on core brands. Apart from this, the company is progressing well with its Global Productivity Improvement Plan, which will lead to savings of more than $100 million in the next 15-18 months.

Fiscal 2020 Guidance

Spectrum Brands reiterated its outlook for fiscal 2020. The company foresees net sales; adjusted EBITDA; and free cash flow growth for fiscal 2020. It projects reported net sales growth in low-single digits. Depending on existing rates, foreign currency translations are expected to hurt the top line marginally. Further, the company continues to expect adjusted EBITDA of $570-$590 million. It anticipates adjusted free cash flow of $240-$260 million. Also, capital expenditure is envisioned to be $90-$100 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted 6.06% due to these changes.

VGM Scores

At this time, HRG has a subpar Growth Score of D, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, HRG has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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