Shares of Newell Brands Inc. (NWL - Free Report) have lost 38.1% in a year’s time, underperforming the industry’s 11.4% decline. This dismal performance can mainly be attributed to the company’s soft sales and strained margins trend. Nevertheless, the company is executing its Transformation Plan well, through market share gains, point of sale growth, innovation, enhancement of e-commerce and cost-saving plans. Let’s delve deep.
Factors Impacting Newell’s Shares
In third-quarter 2018, Newell missed sales estimates for the third straight time. The top line also declined 7.7% year over year on account of the adverse impact from the new revenue recognition standard, unfavorable currency rates and a decline in core sales. The metric was further affected by the loss of sales from the bankruptcy of Toys “R” Us. The company’s business segments too witnessed a sales decline year over year.
Despite gains from cost synergies and savings, Newell has been witnessing margin pressures for the last few quarters now. Absence of earnings related to divested businesses, commodity cost inflation, adverse product mix as well as increased advertising, promotion and investments toward e-commerce expansion have been hurting margins.
Gross margin contracted 10 basis points (bps) in the third quarter of 2018, marking seventh straight quarter of decline. While operating margin expanded 10 bps in the reported quarter, it contracted in the preceding four quarters.
Progress of the Transformation Plan
Newell is pacing up quite well with its Transformation Plan by offloading its non-core businesses, which account for nearly 35% of the company’s sales.
In sync with this, management recently completed the sale of Pure Fishing and Jostens businesses for gross proceeds of nearly $2.6 billion. While the Pure Fishing business was sold to Sycamore Partners, the other was divested to Platinum Equity. Pure Fishing business includes brands like Abu Garcia, All Star, Berkley, Chub, Fenwick, Greys, Hardy, Hodgman, Johnson, JRC, Mitchell, Penn, Pflueger, Sebile, Shakespeare, SpiderWire, Stren and Ugly Stik. The Jostens business comprises products like yearbooks, publications, jewelry and consumer goods, which are used by K-12 educational, college and professional sports segments.
Earlier, the company had divested businesses, including The Waddington Group, Rawlings Sporting Goods Company and Goody Products, for about $2.6 billion of after-tax proceeds. Divestiture of these non-core brands is expected to reshape the company’s portfolio and improve operational efficiency. Management continues to expect roughly $10 billion in net proceeds from these divestitures.
Newell also improved leverage by allocating divestiture proceeds to pay down debt and share repurchases. As a result, it exited the third quarter of 2018 with $2.5 billion lesser debt than the prior year. The company reduced debt by $890 million to $9.6 billion in the reported quarter. Additionally, Newell deployed $107 million for dividends and $511 million for share repurchases. Further, it intends to buyback more than 40% of its outstanding shares, with the divestiture after-tax proceeds.
Apart from reinforcing its financial position, Newell focuses on retaining its investment grade rating and paying an annual dividend of 92 cents per share through 2019, targeting 30-35% payout ratio. The execution of the plan through simplification of operations is likely to reduce the 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.
We expect Newell’s Transformation Plan to provide a cushion to the stock and soon reverse the dismal trend. Additionally, we expect the company to continue with its solid earnings trend, supported by its expected long-term earnings growth rate of 4.9%. Notably, the company has outpaced earnings estimates in 11 of the trailing 14 quarters.
Presently, Newell has a Zacks Rank #3 (Hold).
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