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HRG (SPB) Down 10.2% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Spectrum Brands (SPB - Free Report) . Shares have lost about 10.2% 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 the most recent earnings report in order to get a better handle on the important drivers.

Spectrum Brands’ Q4 Earnings & Sales Miss Estimates

Spectrum Brands reported dismal fourth-quarter fiscal 2018 results, wherein the top and bottom lines missed estimates. Earnings also declined on a year-over-year basis.

Quarterly adjusted earnings from continuing operations of 79 cents per share fell 7.1% year over year and lagged the Zacks Consensus Estimate of $1.13. The downside can be attributed to decline in gross profit and increased distribution costs.

Deeper Insight

Spectrum Brands’ net sales remained flat year over year at $787.8 million but missed the Zacks Consensus Estimate of $808 million. Excluding the $3.1 million impact of foreign currency headwinds, organic net sales inched up 0.4%.

The company’s gross profit decreased 6.5% year over year to $289.9 million, with the gross margin contracting 250 basis points (bps) to 36.8%. The start-up operating inefficiencies at the HHI Kansas and GAC Dayton facilities led to the downturn. Rise in input costs and adverse mix also hurt gross margin. Further, the company reported operating loss of $78.8 million against operating income of $45.8 million in the year-ago period.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) plunged 23.1% to $134.1 million in the fiscal fourth quarter. Moreover, adjusted EBITDA margin contracted 520 bps to 17% on higher operating and distribution costs as well as input cost inflation.

Segmental Performance

Spectrum Brands’ Hardware & Home Improvement segment’s sales rose 3.4% to $360.9 million, courtesy of continued robust demand in residential security as well as plumbing and builders’ hardware in the United States. Also, decline in the customer order backlog at the Kansas distribution center aided top-line growth. Excluding the foreign currency headwinds, the segment’s organic sales improved 3.9% year over year. However, adjusted EBITDA at the segment fell 1.6% to $75.2 million.

Global Pet Supplies segment’s sales were down 2.3% year over year to $212.1 million due to fall in aquatics revenues in the United States, and lower European dog and cat food sales. The decline was somewhat offset by higher U.S. companion animal sales. Excluding the unfavorable foreign currency impacts, organic sales at the segment dipped 1.9%. Also, the segment’s adjusted EBITDA fell 27.3% to $32 million.

The Home & Garden segment’s sales decreased 6.2% year over year to $111.7 million, attributable to lower volumes, partly compensated with robust household control category sales. Further, the segment’s adjusted EBITDA decreased 38.5% to $19.8 million.

The Global Auto Care segment, which is held for sale, reported sales of $103.1 million, up 0.5% year over year. The uptick was driven by robust growth in chemical and refrigerant revenues, somewhat mitigated by a decline in appearance product sales. Excluding unfavorable foreign currency impacts, organic net sales grew 1.1%. Nonetheless, the segment’s adjusted EBITDA plunged 55.1% to $14.6 million.

Other Developments

Recently, Spectrum Brands agreed to sell Global Auto Care business to Energizer Holdings for $1.25 billion in cash and equity. Concurrently, the company also signed an amended agreement for the previously announced sale of Global Batteries & Lighting businesses to Energizer Holdings for $2 billion cash. However, it will retain the Appliances business.

Markedly, the amended agreement was a remedial measure for the consideration of the European Commission. This amendment includes a clause for the potential downward revision of the bid price up to a maximum of $200 million. The company expects to close the sale of Global Battery and Lighting business in early January next year.

Further, management will reclassify the Appliances business as continuing operations, comprising the Personal Care and Small Appliances businesses, effective the first quarter of fiscal 2019. Simultaneously, the Global Auto Care business will be classified as discontinued operations. Notably, the sale proceeds from the Global Auto Care business will include $937.5 million of cash and $312.5 million of Energizer Holdings’ equity. The transaction, anticipated to close in the second quarter of fiscal 2019, is subjected to fulfilling of customary closing conditions and regulatory approvals.

All these strategic actions are expected to help the company focus on core businesses, reduce debt and boost shareholder returns as well as achieve significant organic revenue growth. Further, Spectrum Brands is expected to have a portfolio of four business units, including Hardware and Home Improvement, Home & Garden, Pet, and Appliances.

Financials

Spectrum Brands ended fiscal 2018 with cash and cash equivalents of $552.5 million and above $777 million available under its $800 million Cash Flow Revolver. Total debt outstanding at the fiscal year end was nearly $4,812 million.

Fiscal 2019 Guidance

Spectrum Brands issued outlook for fiscal 2019. Backed by pricing, innovations, higher marketing investments and solid market share, net sales from continuing operations are projected to witness an improvement. Depending on existing rates, impacts from foreign currency translations on sales are anticipated to be modestly negative.

Further, the company envisions adjusted EBITDA from continuing operations to be in the range of $560-$580 million for the fiscal year.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 418.52% due to these changes.

VGM Scores

At this time, HRG has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

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

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. 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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