Helen of Troy Limited (HELE - Free Report) seems to be losing favor with investors, evident from the stock’s 13% decline in the past month compared with the industry’s fall of 1.6%. Factors such as high tariffs, dismal gross margins and a sluggish beauty business have been weighing on the company’s performance.
Nevertheless, Helen of Troy’s Leadership Brands and strong online business have been aiding core business growth. Further, the company is progressing well with the Project Refuel program. Let’s take a closer look at both sides of the story.
Factors Behind Helen of Troy’s Dismal Performance
Helen of Troy is witnessing softness in its Beauty segment. Notably, sales at the Beauty segment did not witness even a single quarter of year-over-year growth throughout fiscal 2018, and continued to remain dismal so far in fiscal 2019. The unit’s performance is impaired by persistent weakness across brick-and-mortar channels, decline in personal care business as well as withdrawal of certain products and brands. In the third-quarter fiscal 2019, sales in this segment dropped 3%. Foreign currency headwinds were also a drag on the unit’s performance in the said period. Further, Beauty sales are projected to dip in low to mid-single digits range.
Also, the company’s gross margin has been sluggish for a while. During the third quarter, consolidated gross margin slipped 0.1 percentage points to 42.2% due to adverse product mix and rise in tariffs. Persistence of these factors remains a threat to margins. Moreover, management expects commodity inflation, high freight costs and impacts of tariff changes to weigh on Helen of Troy’s cost of goods sold in fiscal 2019, which in turn, is likely to dent gross margin.
Coming to tariffs, management believes that the ongoing trade tensions are having a negative impact on domestic and Chinese consumers. Moreover, adverse impacts from pricing actions as well as decelerated growth in China’s e-commerce induced management to narrow the upper end of the sales view for the fiscal year.
Can Strategies Aid a Turnaround?
Helen of Troy has been focused on making solid investments in its “Leadership Brands,” which is a portfolio of market leading brands. Brands in this portfolio, including OXO, Honeywell, Braun, PUR, Hydro Flask, Vicks and Hot Tools, are well-positioned to enhance market share. These brands account for approximately 80% of the company’s sales and are among the company’s highest margin providing, volume generating and efficient businesses. The company’s constant investments in these brands have been results. In the third quarter of fiscal 2019, Leadership Brands’ sales improved nearly 4.9% year over year. Meanwhile, management remains on track with investments in product launches, marketing efforts and e-commerce strategies for these brands.
Additionally, the company is gaining from its consistent online sales and digital marketing efforts. In the third quarter, online sales advanced 6% year over year and comprised almost 18% of the company’s top line. Management plans to make further investments in this arena, in a bid to keep pace with the evolving consumer environment.
Backed by these tailwinds, we expect this Zacks Rank #3 (Hold) stock to return to the growth trajectory.
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