A month has gone by since the last earnings report for Helen of Troy (HELE - Free Report) . Shares have added about 3.6% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Helen of Troy due for a pullback? 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.
Helen of Troy’s Q3 Earnings Decline Y/Y
Helen of Troy Limited came out with third-quarter fiscal 2019 results, with earnings in line with the Zacks Consensus Estimate and sales surpassing the same. This marks the fourth straight sales beat for the company in a row. The company’s top line performance mainly gained from a solid core business.
However, bottom-line declined year on year due to sluggishness in the Health & Home segment. We note that this segment was negatively impacted by decelerated China e-commerce growth. Going ahead, management expects trade tensions between China and United States to continue weighing down the unit’s performance. This combined with adverse impacts of pricing actions compelled management to trim the upper end of the sales view for fiscal 2019.
Results in Detail
Adjusted earnings from continuing operations fell 4% year over year to $2.40 per share. The downside stemmed from lower operating income in the Health & Home segment. This was partially offset by improved operating income in the Houseware unit, reduced interest and tax expenses as well as lower outstanding shares. We note that bottom-line results in the quarter were in line with the Zacks Consensus Estimate.
Net sales advanced 2.4% to $431.1 million, beating the consensus mark of $420.2 million. Top-line growth was mainly supported by a 2.9% rise in the company’s core business, courtesy of strong brick and mortar sales in the Housewares segment and growth in online sales. Further, the company’s Leadership Brands continued to depict sturdy performance and rose nearly 4.9% in the reported quarter. These were partly offset by softness in the personal care category, withdrawal of certain products in the Beauty category, decelerated China e-commerce growth as well as adverse currency movements.
Consolidated gross margin slipped 0.1 percentage points (or 10 basis points) to 42.2%, due to adverse product mix and rise in tariffs. These were partly made up by margin improvements from strength in Leadership Brands.
Consolidated SG&A expenses as a percentage of sales were up 1.9 percentage points, resulting from increased expenses pertaining to advertising, freight, share share-based compensation and product claims.
Adjusted operating income declined 8.9% to $70.6 million, while adjusted operating margin declined 200 basis points (bps) due to higher tariffs, advertising costs, freight expenses and share-based compensation expenses. These were somewhat countered by strength in Leadership Brands as well as favorable impacts of currency rates and forward contract settlements.
Housewares net sales increased 11.4%, courtesy of solid online sales, product launches as well as higher points of sales and increased distribution with domestic brick and mortar customers. However, these positives were somewhat offset by reduced club channel sales and lower inventory from a key online retailer.
Adjusted operating income improved 2.7% to $32.6 million, while adjusted operating margin declined 190 bps to 22.8%.
Net sales in the Health & Home segment declined 0.7% due to adverse currency fluctuations and decline in the unit’s core business. Sluggish core business performance stemmed from weak online sales and adverse impacts from international distribution. Performance of the segment was also hurt by decelerated China e-commerce growth. Such downsides were partially made offset by increased seasonal growth as well as enhanced distributions and shelf space gains related to existing customers.
Adjusted operating income declined roughly 23.7% to $24.5 million, while adjusted operating margin contracted 400 bps to 13%.
Beauty sales dropped 3%, thanks to persistent weakness across brick-and-mortar channels, decline in personal care business and the withdrawal of certain products and brands as well as foreign currency headwinds. These downsides were partly compensated by increased online sales, improved international sales and product launches.
Adjusted operating income fell 1.2% to $13.6 million, while margin improved 20 bps to 13.5%.
Other Financial Details
Helen of Troy ended the quarter with cash and cash equivalents of $19.1 million and total debt of $339.7 million.
Net cash from operating activities came in at $109.5 million for the first nine months of fiscal 2019.
Project Refuel Update
Helen of Troy is on track with Project Refuel program. It is expected to conclude by the first quarter of fiscal 2020 and is likely to entail cumulative restructuring charges of $5-$5.5 million over the tenure of the program. Further, management continues to expect annualized profit growth of nearly $8-$10 million from this program.
Fiscal 2019 Outlook
Management is impressed with sturdy growth in Leadership Brands, strong online sales and advancements in the Housewares segment. However, sluggishness in the Beauty segment and a volatile trading environment between China and United States are worries.
That said, management revised sales outlook for fiscal 2019. Consolidated net sales are now projected in the band of $1.535-$1.550 billion compared with the earlier projection of $1.535-$1.560 billion. The narrowed upper end of the sales view takes into consideration the adverse impacts stemming from pricing actions and decelerated growth in China’s e-commerce arising out of higher inventory levels in a product category. These headwinds are most to impact performance of the Health & Home segment. Moreover, management believes that the ongoing trade tensions are having an adverse impact on both domestic and Chinese consumers.
Additionally, the revised top-line view considers the adoption of ASU 2014-09 (Revenue Recognition Standard). Also, net sales guidance includes expected unfavorable impact of nearly 1.1% from the severity of the cold/cough/flu season.
Further, sales in the Housewares segment are anticipated to grow 11-13% compared with the previous forecast of increase in the band of 9-11%. Health & Home sales are now expected to increase 2% to 4%, down from growth of 5-7% anticipated earlier. Sales in the unit are likely to bear a 2.3% adverse impact from the average cold/cough/flu assumption. Beauty sales are still projected to decline in low to mid-single digits.
Adjusted effective tax rate is likely to be 6.9-7.7% in fiscal 2019.
Finally, adjusted earnings from continuing operations are projected to be $7.70-$7.95, up from the previous guidance of $7.65-$7.90. The improved bottom-line view reflects reduced share count from open market repurchases carried out during the third quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, Helen of Troy has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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 this revision indicates a downward shift. It's no surprise Helen of Troy has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.