It has been about a month since the last earnings report for Newell Brands (NWL - Free Report) . Shares have lost about 1.4% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Newell Brands due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Newell Beats on Q2 Earnings, Lags Sales, Trims '18 View
Newell Brands reported mixed second-quarter 2018 results, wherein the company’s bottom line outpaced the Zacks Consensus Estimate while the top line lagged the same. While this marked the company’s third straight earnings beat, sales marked second consecutive miss. Further, management lowered its outlook for 2018.
The company’s normalized earnings of 82 cents per share outpaced the Zacks Consensus Estimate of 78 cents but declined 5.7% year over year. The year-over-year decrease can be attributed to lower core sales volume, adverse mix owing to lower Writing sales volume as well as inflation. These were somewhat offset by cost savings and synergies.
On a reported basis, earnings per share came in at 27 cents, down from 46 cents earned in the year-ago quarter.
Net sales totaled $2,203.1 million, which missed the Zacks Consensus Estimate of $3,839 million. The top line also declined 12.8% year over year on account of the new revenue recognition standard and adverse impact of last year’s divestitures. The Baby division’s disrupted business along with a significant inventory destocking in the Writing division’s office superstore and distributive trade channels further hurt the top-line performance. Additionally, core sales dropped 6.2% mainly due to 14.5% decline in the Learning & Development segment (Writing and Baby) and weakness across the coolers, tents and fresh preserving businesses due to the late arrival of Spring across most parts of the United States.
Normalized gross margin contracted 50 basis points (bps) to 35.1% while normalized operating margin declined 150 bps to 10.9% in the quarter under review.
This Hoboken, NJ-based company has re-aligned its seven divisions from continuing operations into three segments for reporting purposes. As of Jun 30, 2018, the company has been reporting its financial results in three segments, namely, Food & Appliances, Home & Outdoor Living, and Learning & Development. Further, the company’s Other segment comprises results for businesses that were divested last year.
The Food & Appliances segment’s (which includes Appliances & Cookware Food) net sales dropped 11.9% to $621 million in the quarter. This downside can be attributed to currency headwinds, adoption of new revenue recognition standard, inventory in Latin America related to SAP, weakness in the fresh preserving business as well as challenges in the U.S. Beverage Appliance category. These were partly offset by robust innovations backed by Calphalon Space Saving Cookware and Crock-Pot Express Crock.
Net sales at the Home & Outdoor Living segment (which includes Outdoor & Recreation, Home Fragrance, and Connected Home & Security) came in at $742 million, down 6.7% from the prior-year period. The top line was hurt by the new revenue recognition standard as well as softness across Home Fragrance in EMEA and Outdoor business. This was somewhat mitigated with robust growth witnessed in First Alert and Home Fragrance in U.S. mass channel.
The Learning & Development segment (which includes Writing and Baby) generated net sales of $839 million, which were down 15.3% from the prior-year period. The downside was due to adoption of new revenue recognition standard, lower core sales as well as the absence of last year’s pipeline build on Slime by Elmer’s.
Transformation Plan Update
In line with its Accelerated Transformation Plan, Newell has completed the divestiture of its packaging maker, The Waddington Group, to Novolex. Also, it has completed the sale of the Rawlings Sporting Goods Company, Inc. in the quarter under review. Further, it has reported divested businesses as discontinued operations. Currently, the assets held for sale have been reorganized as continuing operations into new operating segments. It remains on track with the sale processes.
Furthermore, management had undertaken significant measures to right-size the company’s new portfolio. All these positive moves are expected to speed up value creation and transform the portfolio to leverage the company’s abilities with respect to innovation, design and e-commerce. Also, it will help improve operational performance, deleverage the balance sheet as well as enhance the shareholder value.
Evidently, the company’s gross debt summed $10.5 billion at the end of the second quarter, which was $900 million lower than prior-year number. Net debt totaled $8.2 billion, down $2.4 year over year. In addition, it intends deleveraging an incremental $900 million by the end of the third quarter.
Other Financial Details
Newell ended the quarter with cash and cash equivalents of $2,279.4 million, long-term debt of $9,300.7 million and shareholders’ equity of $13,958.3 million, excluding non-controlling interests of $32.9 million.
The company reported negative operating cash flow of $390.5 million compared with negative $206.8 million in the prior-year period. During the six months of 2018, Newell returned $224.9 million to shareholders in the form of dividends.
Management trimmed its guidance for 2018 to adjust for the Waddington and Rawlings businesses’ divestitures. Net sales are now projected in the band of $8.7-$9 billion for 2018 versus $14.4-$14.8 billion range. Further, it anticipates normalized operating margins between 12% and 12.4% in the second half of the year. Core sales are anticipated to improve sequentially from down low-single digits rate in the third quarter to up low-single digits rate in the fourth quarter.
Further, normalized earnings per share are envisioned in the band of $2.45-$2.65 and operating cash flow is projected in the range of $0.9-$1.2 billion. Earlier, Newell had projected earnings per share in the $2.65-$2.85 range whereas operating cash flow was expected to be between $1.15 billion and $1.45 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -62.63% due to these changes.
At this time, Newell Brands has a poor Growth Score of F, a grade with the same score on the momentum front. However, 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.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Newell Brands has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.