Strong consumption trends, especially in the healthcare segment, have been driving Prestige Brands Holdings Inc. (PBH - Free Report) lately. This, in fact, propelled management to commence initiatives for transforming its business to focus solely on healthcare. Additionally, the company has been undertaking acquisitions to gain improved consumer reach. On the flip side, high costs and a sluggish cleaning business have been weighing on Prestige Brands’ performance. Let’s take a closer look into the aspects impacting this Zacks Rank #3 (Hold) company.
Strong Consumption Trends & Lucrative Buyouts
Prestige Brands boasts of strong consumption trends in most of its core brands. This trend particularly fueled the North American OTC Healthcare segment, during the first quarter of fiscal 2019. Prior to this, in fiscal 2018, Prestige Brands witnessed company-wide consumption growth of approximately 3%. Going ahead, in fiscal 2018, the company anticipates 2-3% growth in consumption rates.
Additionally, to maintain on growth track, the company pursues strategic mergers and acquisitions. The acquisition of Fleet in January 2017, one of its largest transactions, is expected to radically enhance Prestige Brands’ growth prospects. In fact, the company is on track with building brands under the Fleet banner, such as Summer's Eve. Prior to this, in 2012, the company acquired BC and Goody's that expanded the company’s distribution as well as enabled better customer reach. Other noteworthy acquisitions include DenTek Holdings, Inc in 2016 and Hydralyte in 2015.
Opportunities in Healthcare Bodes Well
Motivated by the strong consumption trends in healthcare, Prestige Brands recently revealed plans to completely transform business. Well, management already commenced initiatives to achieve the target by announcing plans to change corporate name to Prestige Consumer Healthcare, Inc. This move is an important milestone for the company that prides on having a strong portfolio of healthcare brands. Moreover, management stated that focusing on areas that have greater growth prospects, such as healthcare, will aid the company in utilizing resources efficiently.
The company is facing year-over-year hikes in cost of sales for quite some time. Markedly, cost of sales inched up 0.2% in the first quarter of fiscal 2019. This was preceded by increases of 3.8%, 33.3%, 25.1% and 28.5% in the fourth, the third, the second and the first quarters of fiscal 2018, respectively. Persistence of such high costs may pose a threat to the company’s profitability. Moreover, higher freight and warehouse costs have been a drag on gross margin levels for long.
To top it, Prestige Brands’ sluggish Household Cleaning business has been dampening the company’s performance. Stiff competition and sluggish brands have been marring the segment for a while, which has been limiting top-line growth. Thanks to such soft trends, the company announced the divestiture of the household cleaning business in July 2018.
These headwinds have lowered investors’ optimism in the stock. Shares of the company have lost close to 23.5% in the past year, against the industry's rise of 6%.
We believe that the aforementioned headwinds can be cushioned by Prestige Brands’ strategic initiatives. Moreover, the company continues to expect favorable impacts from tax rates, which is likely to offset negative impacts of higher costs. In fact, such trends were also witnessed in the company’s first-quarter fiscal 2019 results. Further, we expect that Prestige Brands’ focus on healthcare will enable efficient utilization of resources and also revive price performance.
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