Business Context and Reporting Period
Helen of Troy Limited is a Bermuda-domiciled consumer products company operating through Home & Outdoor, Health & Wellness, and Beauty. This Form 10-Q covers the three months ended May 31, 2022, the first quarter of fiscal 2023. Results include a full quarter of Osprey, acquired December 29, 2021, and approximately six weeks of Curlsmith, acquired April 22, 2022.
Financial Performance and Position
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $508.1 million | $541.2 million | Down 6.1% |
| Gross profit / margin | $211.2 million / 41.6% | $220.6 million / 40.8% | Profit down 4.3%; margin up 0.8 points |
| Operating income / margin | $33.9 million / 6.7% | $64.8 million / 12.0% | Down 47.7%; margin down 5.3 points |
| Net income | $24.6 million | $57.0 million | Down 56.8% |
| Diluted EPS | $1.02 | $2.31 | Down 55.8% |
| Adjusted operating income | $69.3 million / 13.6% | $95.0 million / 17.5% | Down 27.0%; margin down 3.9 points |
| Adjusted diluted EPS | $2.41 | $3.48 | Down 30.7% |
Segment sales were $234.3 million in Home & Outdoor, $168.9 million in Health & Wellness, and $104.9 million in Beauty. Home & Outdoor operating income increased to $29.8 million, while Health & Wellness reported a $6.1 million operating loss and Beauty operating income declined to $10.3 million.
Operating performance was pressured by lower organic sales, inflationary costs, higher personnel, marketing and distribution expenses, increased share-based compensation, acquisition-related expenses, and unfavorable operating leverage. Gross margin benefited from sales mix, lower inventory obsolescence, lower EPA compliance costs, and Beauty product mix.
Operating cash flow was negative $38.4 million, compared with negative $63.4 million in the prior-year quarter. Investing cash flow was negative $222.5 million, including $148.1 million for acquisitions and $76.2 million of capital and intangible asset expenditures, principally related to a new distribution center. Financing cash flow was $276.8 million, driven by borrowings. Cash increased to $49.3 million from $33.4 million at February 28, 2022.
At May 31, 2022, inventory was $613.6 million, receivables were $475.9 million, and total assets were $3.14 billion. Total debt was $1.11 billion, including $1.09 billion of non-current debt. The company had $123.8 million available under its credit agreement before giving effect to subsequent term-loan activity, or $373.8 million after giving effect to the June 28, 2022 amendment and related repayment of revolving borrowings. The company was in compliance with debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales declined 6.1%, with organic sales down $84.1 million and foreign exchange reducing reported sales by approximately $3.5 million. Acquisitions contributed $54.5 million, including $51.2 million from Osprey and $3.2 million from Curlsmith.
- Home & Outdoor sales increased 21.0%, primarily from Osprey, while Health & Wellness sales fell 17.2% and Beauty sales fell 26.9%.
- Leadership Brand sales increased 1.4% to $435.2 million, while all other sales declined 35.0%.
- EPA compliance costs were $11.6 million in Q1 FY2023 versus $13.1 million in Q1 FY2022. Current-quarter costs included $4.4 million of obsolete packaging write-offs and $7.2 million of additional compliance costs.
- A weather-related incident at a third-party storage facility resulted in a $34.4 million inventory write-off, fully offset by probable insurance recoveries recorded in cost of goods sold. Damaged inventory nevertheless reduced product availability and adversely affected sales.
- Interest expense increased 46.0% to $4.4 million because of higher debt balances and interest rates. A 1.0% increase in market rates as of May 31, 2022 was estimated to increase annual interest expense by approximately $10 million, net of swaps.
- The company completed the sale of its remaining Latin America and Caribbean Personal Care business for $1.8 million and recognized a $1.3 million gain. No assets or liabilities remained classified as held for sale at quarter-end.
- Share repurchases were limited to 89,458 shares acquired through equity-award net exercises for $18.2 million; there were no open-market repurchases. Approximately $403.8 million remained under the repurchase authorization.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide a clear numerical full-year sales or EPS guidance range. Management expects elevated borrowings during the second and third fiscal quarters because of higher inventory purchases, longer supply lead times, and lower consumer demand. Management stated that operating cash flows and available financing are expected to provide sufficient resources for foreseeable liquidity needs, while noting that this assessment depends on current conditions.
On June 28, 2022, after quarter-end, the company amended its credit agreement to replace LIBOR with Term SOFR, borrowed $250 million of term loans, and temporarily increased the maximum leverage ratio following a qualified-acquisition notice. The agreement matures March 13, 2025.
- COVID-19-related supply chain disruption, freight constraints, labor shortages, inflation, higher interest rates, and possible shortages of materials may increase costs and restrict product availability.
- EPA packaging and labeling remediation remains ongoing. Additional repackaging, storage, vendor, legal, return, discount, or distribution costs could materially affect results; potential fines or penalties were not expected but cannot be ruled out.
- The company faces patent litigation and an International Trade Commission investigation brought by Brita LP concerning certain PUR gravity-fed filtration systems. The outcome, potential loss, and timing are not predictable and could be material if adversely resolved.
- Demand is discretionary and exposed to inflation, reduced consumer spending, retailer inventory changes, economic downturns, online-channel shifts, and the severity of the cough/cold/flu season.
- Acquisition integration and synergy realization for Osprey and Curlsmith, foreign exchange movements, floating-rate debt, third-party manufacturing, cybersecurity, product liability, recalls, and regulatory compliance remain material risks.
Facts Investors Should Verify
- Reconcile GAAP results to adjusted operating income and adjusted EPS, particularly the treatment of EPA compliance costs, acquisition expenses, amortization, restructuring, and share-based compensation.
- Monitor Health & Wellness recovery, EPA remediation progress, product availability, customer returns, and any additional compliance charges.
- Confirm insurance collections related to the $34.4 million inventory loss and determine whether business-interruption proceeds or losses arise later.
- Track leverage, borrowing availability, covenant headroom, interest-rate exposure, and the effect of the June 2022 credit amendment.
- Assess whether Osprey and Curlsmith generate the expected sales, margins, and integration synergies as acquisition comparisons normalize.
- Follow the Brita patent litigation and ITC investigation for potential import restrictions, injunctions, damages, or product-distribution effects.