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Will Newell's (NWL) Transformation Plan Drive Stock Further?

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Newell Brands Inc. (NWL - Free Report) is progressing smoothly with the execution of its Transformation Plan. The plan mainly aims at transforming the company into a simpler, stronger and faster one, so that it can leverage its abilities in relation to innovation, design and e-commerce. However, the company is witnessing lower core sales and strained margins for a while now.

Yet, shares of this Zacks Rank #3 (Hold) company have gained 4.7% in a month, outperforming the industry’s 0.3% increase. Let’s delve deep into the company’s Transformation Plan and other attributes to see whether the stock can be an investor's favorite.



Transformation Plan – A Boon

Newell is well on track with the execution of its Transformation Plan through market share gains, point of sale growth, innovation, e-commerce improvement, and cost-saving plans. Also, management is looking to exit non-strategic assets, reduce complexity and focus on key consumer-focused brands. In May, Newell expanded the Accelerated Transformation Plan, which is expected to transform the company and create value. Notably, the plan aims at restructuring Newell’s portfolio into seven core consumer segments that can generate above $9 billion sales; offload non-core businesses that account for nearly 35% of the company’s sales; utilize $10 billion after-tax proceeds from divestitures along with free cash flow to lower debt and make share repurchase; and retain investment grade rating with an annual dividend of 92 cents per share through 2019, targeting 30-35% payout ratio.

Additionally, this plan focuses on the simplification of the company’s operations, which is likely to reduce the company’s number of manufacturing facilities by 66%, distribution centers by 55%, brands by 45%, number of employees by 39% as well as reduce above 30 ERP systems to two by the end of 2019. Management will also focus on right-sizing the cost structure for anticipated smaller net sales, remove stranded corporate expenses and recover the synergies lost through the divestitures. These efforts are likely to enhance Newell’s operational performance and financial flexibility and boost shareholder value, going ahead.

With respect to this plan, Newell also inked a deal to divest its packaging maker — The Waddington Group — to Novolex for roughly $2.3 billion. The transaction is expected to generate after-tax proceeds of nearly $2.2 billion, which will be further used in deleveraging and share repurchase. Newell added Jostens and Pure Fishing brands to the list of potential divestitures as well. Recently, management has also agreed to sell its sporting goods subsidiary — Rawlings Sporting Goods Company, Inc. — to a fund managed by Seidler Equity Partners. The private investment firm has partnered with Major League Baseball for the transaction. Markedly, the sale will include the Rawlings, Miken and Worth brands of the St. Louis, MO-based subsidiary. Newell will receive gross proceeds of nearly $395 million from the transaction and after-tax proceeds from the sale are expected to be about $340 million.

Currently, Newell’s divestiture transactions are on track and expected to be completed by the end of 2019. Thereafter, management projects sales of roughly $9.5 billion, with normalized operating margin expansion of more than 15% by 2020.

Concerns

Although the Transformation Plan is progressing well, it failed to deliver higher sales and lift the company’s margins. Apparently, the company has lagged sales estimates in four of the trailing seven quarters, including the last reported quarter. Also, the top line fell 7.6% year over year in first-quarter 2018 due to adverse impact of the last year’s divestitures, net of buyouts. Sales were also hurt by the disrupted business of the Baby division along with a considerable inventory destocking in the Writing division’s office superstore and distributive trade channels. Core sales declined 3.5%, mainly due to soft Writing and Baby sales as well as decline across most segments. In 2018, core sales are projected to be flat to down low-single digit rate.

Further, Newell has been witnessing strained margins for the last few quarters now despite gains from cost synergies and savings. Absence of earnings related to divested businesses, commodity cost inflation, adverse product mix as well as increased advertising, promotion and e-commerce investment have been also weighing on margins.

Bottom Line

We believe that the company’s robust Transformation Plan along with solid brand portfolio and strong balance sheet will offset the aforesaid concerns. As a result, its shares are likely to march higher in the future. Meanwhile, the stock’s Value Score of B with a long-term earnings growth rate of 6.1% remain encouraging.

Want Top-Ranked Stocks in the Same Sector? Check These

Medifast, Inc. (MED - Free Report) has a long-term earnings growth rate of 15% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ollie's Bargain Outlet Holdings, Inc. (OLLI - Free Report) has an impressive long-term earnings growth rate of 23% and a Zacks Rank #2 (Buy).

Tupperware Brands Corporation (TUP - Free Report) , also a Zacks Rank #2 stock, has delivered a positive earnings surprise in each of the trailing four quarters by an average of 5%.

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