Helen of Troy (HELE) Down 1.8% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

Sat, Aug 8, 2020, 9:30 AM 5 min read

Will the recent negative trend continue leading up to its next earnings release, or is Helen of Troy 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 catalysts.

Helen of Troy's Q1 Earnings & Sales Beat Estimates

Helen of Troy Limited reported robust first-quarter fiscal 2021 results. During the quarter, both top and bottom lines increased year over year and beat the Zacks Consensus Estimate. Results largely gained from strength in the Health and Home unit, thanks to higher demand amid the pandemic. Also, solid online sales and contributions from Drybar Products’ acquisition were drivers. However, store closures by key customers due to COVID-19 affected the Housewares and Beauty segments.

Given the unprecedented impacts of COVID-19, management did not provide any guidance for fiscal 2021. While the company has been undertaking measures to preserve cash flow and curtail costs, given a solid first-quarter show, management said that it is relaxing some of these measures and making certain investments in its Phase II Transformation efforts. Apart from this, as part of its strategy of keeping focus on Leadership Brands, the company had decided to divest some assets in its mass-market personal care business (Personal Care) during the fourth quarter of fiscal 2020. The company expects the divestiture to close in fiscal 2021.

Adjusted earnings rallied 22.8% year over year to $2.53 per share, easily surpassing the Zacks Consensus Estimate of $1.57. Higher operating income in the Health and Home segment was the key driver, partly offset by softness in the Housewares segment, elevated interest costs and an increase in the number of shares outstanding.

Net sales advanced 11.8% year over year to $420.8 million, beating the consensus mark of $369.3 million. The year-over-year upside was driven by 11.1% organic sales growth and gains from the acquisition of Drybar Products. Notably, organic sales growth was backed by brick and mortar strength in domestic as well as international sales in the Health and Home unit along with solid online sales. This was somewhat negated by soft organic sales in the Beauty and Housewares segment due to the pandemic-led store closures by key customers, reduced discretionary demand and currency headwinds.

Consolidated gross margin expanded 1.8 percentage points to 42.6%, courtesy of favorable product mix in the Organic Beauty business as well as the Health and Home segment, positive impact from Drybar Products' buyout, improved channel mix in the Housewares unit and reduced air freight charges. This was partly countered by an adverse mix of Housewares sales in the overall top line, an adverse mix within the Housewares unit, increased direct import sales and currency woes.

Adjusted operating income rose 19.8% to $71.1 million and the adjusted operating margin expanded 1.1 percentage points to 16.9%. The upside in operating margin can be attributable to improved sales, factors aiding the gross margin and cost-containment efforts. Adjusted EBITDA grew 20% to $76 million.

Segmental Performance

Net sales in the Housewares segment dropped 3% due to temporary closure of key customer stores stemming from coronavirus, soft international sales and currency headwinds. This was partly compensated by strong online sales for OXO and Hydro Flask, increased club sales and product introductions. Adjusted operating income in the unit declined 20.3% to $27.4 million.

Net sales in the Health & Home segment advanced 29.1%, thanks to Organic business growth of 30.2%. Organic sales were backed by burgeoning demand for healthy living and healthcare products across domestic and international markets, both in stores and online. The store closure impact was lesser in this segment as core retail giants like Walmart, Target and Amazon, to name a few, and the drug store channel remained operational and saw high traffic. These factors were partially offset by an unfavorable currency movement as well as the impact from net distribution changes. Adjusted operating income soared 75.7% to $37.3 million.

Sales in the Beauty segment improved 5%, mainly owing to contributions from the buyout of Drybar Products, online strength and product introductions. The upside was countered by softness in the Organic business due to customer store closures, weak personal care business, lower discretionary demand, supply hurdles for a key product as well as currency-related challenges. Adjusted operating income surged 72.7% to $6.4 million.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $88.5 million and total debt (short and long-term) of $324.9 million. Net cash from operating activities for the period came in at $92.8 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review.

VGM Scores

At this time, Helen of Troy has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, 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 C. 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. It comes with little surprise Helen of Troy has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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