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The most recent earnings report from Helen of Troy Limited (NASDAQ:HELE) was disappointing for shareholders. While the headline numbers were soft, we believe that investors might be missing some encouraging factors.
Our free stock report includes 3 warning signs investors should be aware of before investing in Helen of Troy. Read for free now.
The Impact Of Unusual Items On Profit
To properly understand Helen of Troy's profit results, we need to consider the US$69m expense attributed to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If Helen of Troy doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.
That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.
An Unusual Tax Situation
Having already discussed the impact of the unusual items, we should also note that Helen of Troy received a tax benefit of US$32m. This is meaningful because companies usually pay tax rather than receive tax benefits. The receipt of a tax benefit is obviously a good thing, on its own. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal. So while we think it's great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.
Our Take On Helen of Troy's Profit Performance
In the last year Helen of Troy received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. Having said that, it also had a unusual item reducing its profit. After taking into account all these factors, we think that Helen of Troy's statutory results are a decent reflection of its underlying earnings power. So while earnings quality is important, it's equally important to consider the risks facing Helen of Troy at this point in time. For example, Helen of Troy has 3 warning signs (and 2 which make us uncomfortable) we think you should know about.