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Newell Brands (NWL) Down 28.3% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Newell Brands (NWL - Free Report) . Shares have lost about 28.3% 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 its most recent earnings report in order to get a better handle on the important drivers.

Newell Q4 Earnings Beat, Sales Miss Estimates

Newell Brands reported mixed fourth-quarter 2018 results, wherein the company’s bottom line outpaced the Zacks Consensus Estimate but the top line lagged. We note that sales miss along with soft earnings projection for 2019 are not well perceived by investors. For 2019, management envisions normalized earnings per share of $1.50-$1.65.

Q4 Highlights

Newell delivered normalized earnings per share of 47 cents, which outpaced the Zacks Consensus Estimate of 41 cents.

Net sales totaled $2,340.6 million, which missed the Zacks Consensus Estimate of $2,404 million and declined 6% year over year. The downside can be attributed to adverse impact from the new revenue recognition standard, foreign currency headwinds and soft core sales.

Further, core sales dipped 1.2%. However, the company reported improved core sales trends across all segments, on a sequential basis. Also, three of the four regions witnessed core sales growth trends sequentially. Backed by strength in Writing, the Learning & Development division returned to growth during the reported quarter.

Normalized gross margin expanded 170 basis points (bps) to 34.7%, while normalized operating margin improved 70 bps to 11.4% in the quarter under review.

Segmental Performance

The Learning & Development segment (which includes Writing and Baby) recorded net sales of $707 million, which decreased 3.2% from the prior-year period number. Adoption of new revenue recognition standard, unfavorable currency and decline in core sales for Baby due to the bankruptcy of Toys “R” Us led to the downturn. However, it was largely negated by the segment’s overall core sales growth.

The Food & Appliances segment’s (which includes Appliances & Cookware Food) net sales decreased 7.2% to $824 million. The decline can be attributed to currency headwinds, adoption of new revenue recognition standard and soft core sales, mainly due to lower promotional activity in Food.

Net sales at the Home & Outdoor Living segment (which includes Outdoor & Recreation, Home Fragrance, and Connected Home & Security) totaled $809 million, down 7.2% from the prior-year period. The top line was hurt by the new revenue recognition standard, unfavorable currency and weak core sales, primarily due to lost distribution for Coleman. This was somewhat mitigated with robust growth witnessed in Connected Home & Security as well as return to growth of Home Fragrance business in Europe.

Other Developments

Newell has made a substantial progress in its Accelerated Transformation Plan announced in January last year. Also, it has been improving operational performance through the divestiture of non-core businesses, deleveraging balance sheet and returning cash to its shareholders.

As part of the progress, the company has concluded divestitures of Pure Fishing and Jostens businesses for total sales proceeds of $2.5 billion. Further, Newell deployed $102 million for the payment of dividends and $996 million for share repurchases in the fourth quarter. Also, the company repaid debt of $2.6 billion.

Other Financial Details

Newell ended the quarter with cash and cash equivalents of $495.7 million, long-term debt of $6,696.3 million and shareholders’ equity of $5,243 million, excluding non-controlling interests of $34.8 million.

During 2018, the company generated operating cash flow of $680 million compared with $966.2 million in the prior-year period.
 
Outlook

Management issued guidance for first-quarter and 2019. The company notified changes in its normalization practice. As a result, it has issued and will continue to present certain non-GAAP financial metrics, which are referred to as normalized measures. Notably, this guidance includes the aforementioned change.

Net sales are projected to be $8.2-$8.4 billion along with core sales decline in low single digits for 2019. Further, the company anticipates normalized operating margin to expand 20-60 bps. Operating cash flows are projected to be $300-$500 million during the same period.

For first-quarter 2019, Newell estimates net sales of $1.66-$1.70 billion along with core sales decline in the 2-4% range. It also anticipates normalized operating margin to grow 10-50 bps. Normalized earnings per share are envisioned in the band of 4-8 cents for the quarter.

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 80% due to these changes.

VGM Scores

Currently, Newell Brands has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile 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 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 #4 (Sell). We expect a below average return from the stock in the next few months.


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