Helen of Troy Limited — Fiscal 2023 Second-Quarter Form 10-Q
Business context and reporting period
Helen of Troy is a global consumer-products company operating through Home & Outdoor, Health & Wellness, and Beauty. The filing covers the three and six months ended August 31, 2022, with comparisons to the corresponding 2021 periods. The business is seasonal, with historically higher sales and operating income in the fiscal third quarter.
Fiscal 2023 results include Osprey, acquired December 29, 2021, and approximately 13 weeks of Curlsmith results, acquired April 22, 2022. The Company completed the divestiture of its remaining Personal Care business in March 2022.
Financial performance and liquidity
| Metric | Three months ended August 31, 2022 | Year-over-year change | Six months ended August 31, 2022 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $521.4 million | +9.7% | $1,029.5 million | +1.3% |
| Gross profit margin | 42.5% | Down 1.8 points | 42.0% | Down 0.4 points |
| Operating income | $46.9 million | Down 30.2% | $80.9 million | Down 38.8% |
| Operating margin | 9.0% | Down 5.2 points | 7.9% | Down 5.1 points |
| Net income | $30.7 million | Down 40.2% | $55.3 million | Down 49.0% |
| Diluted EPS | $1.28 | Down from $2.11 | $2.29 | Down from $4.42 |
| Adjusted operating income | $72.3 million | Down 11.2% | $141.6 million | Down 19.7% |
| Adjusted diluted EPS | $2.27 | Down from $2.65 | $4.69 | Down from $6.14 |
Six-month operating cash flow was negative $75.5 million, compared with negative $58.3 million in the prior year. Investing cash outflow was $258.9 million, including $112.6 million of capital and intangible-asset expenditures and $148.1 million of net acquisition payments. Financing activities provided $340.6 million, primarily from borrowings.
Cash and cash equivalents were $39.7 million at August 31, 2022. Inventory increased to $643.2 million from $558.0 million at February 28, 2022, while receivables increased to $507.3 million from $457.6 million.
Total debt was $1.17 billion, excluding unamortized financing fees, compared with $816.2 million at February 28, 2022. Borrowings included $908.0 million of revolving loans, $250.0 million of term loans, and a $14.8 million MBFC Loan. The Credit Agreement provides $324.3 million of additional borrowing availability after consideration of outstanding letters of credit. The Company was in compliance with its debt covenants.
Debt is primarily floating-rate. Management estimates that a 1.0 percentage-point increase in market rates as of August 31, 2022 would increase annual interest expense, net of swaps, by approximately $10.5 million. Interest expense rose to $9.2 million in the quarter and $13.5 million year to date, versus $3.3 million and $6.3 million, respectively.
Material changes versus the prior comparable period
- Quarterly sales growth was driven principally by Osprey and Curlsmith acquisitions, which contributed approximately $57.6 million; organic sales declined 1.5% and foreign currency reduced sales by approximately $4.2 million.
- Six-month sales growth was largely acquisition-driven: acquisitions contributed approximately $112.1 million, while organic sales declined 9.0% and foreign currency reduced sales by approximately $7.7 million.
- Home & Outdoor sales increased 11.8% in the quarter and 16.1% year to date, primarily from Osprey. Segment operating margin declined because Osprey carries a lower margin and due to inflation, freight, labor, and marketing costs.
- Health & Wellness sales increased 27.6% in the quarter and 1.1% year to date, partly reflecting easier comparisons following prior-year EPA-related shipment restrictions. The segment reported a $2.6 million quarterly operating loss and an $8.8 million year-to-date operating loss.
- Beauty sales declined 15.4% in the quarter and 21.7% year to date. Lower hair-appliance demand, retailer inventory reductions, and the Personal Care divestiture outweighed Curlsmith contribution and prestige personal-care growth.
- Gross margin contracted due to $8.4 million of quarterly and $20.0 million of year-to-date EPA compliance costs, inflationary costs, inventory obsolescence, and unfavorable product mix.
- SG&A increased 18.7% in the quarter and 16.2% year to date, reflecting higher freight, marketing, wages, distribution, amortization, acquisition costs, and share-based compensation.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide a clear consolidated revenue or EPS outlook in the filing text. Management expects elevated borrowings during fiscal 2023 because of higher inventory purchases, supply-chain uncertainty, longer lead times, and lower consumer demand. The Company believes operating cash flows and available financing will fund foreseeable liquidity needs, but notes that this assessment is subject to macroeconomic and credit-market conditions.
Project Pegasus restructuring is expected to generate annualized pre-tax operating profit improvements of approximately $75 million to $85 million, beginning in fiscal 2024 and substantially achieved by the end of fiscal 2026. The Company expects approximately $85 million to $95 million of one-time pre-tax restructuring charges, primarily through fiscal 2025. It incurred $4.8 million in such charges during the quarter and year to date.
- EPA packaging and labeling compliance remains a material risk. The Company incurred $20.0 million of related costs year to date and expects additional costs, potential customer returns, discounts, distribution losses, and possible fines or penalties.
- Inflation, rising interest rates, freight costs, labor costs, supply shortages, shipping constraints, and retailer inventory rebalancing may continue to pressure demand, margins, cash flow, and liquidity.
- COVID-19 developments, geopolitical events including the Russia-Ukraine conflict, foreign-currency volatility, and weaker discretionary consumer spending could adversely affect results.
- Brita LP patent litigation and a related International Trade Commission proceeding concerning PUR gravity-fed filtration systems remain unresolved. The Company cannot predict the outcome or potential loss amount; an adverse outcome could materially affect results.
- A March 2022 weather-related inventory loss resulted in a $34.4 million write-off in the first quarter, fully offset by probable insurance recoveries. Future property or business-interruption insurance proceeds above recorded losses will be recognized when received.
Most important facts for investors to verify
- Whether Project Pegasus achieves its targeted $75 million to $85 million annualized savings and how the projected $85 million to $95 million restructuring cost is recognized.
- Whether EPA repackaging and relabeling activities are completed without additional material costs, shipment interruptions, penalties, or customer claims.
- Debt reduction, interest-rate exposure, covenant headroom, and the March 2025 maturity of the revolving and term-loan facilities.
- Inventory normalization, working-capital improvement, and a return to positive operating cash flow.
- Organic demand trends, particularly in Beauty and Home & Outdoor, excluding acquisition contributions and currency effects.
- Integration and profitability of Osprey and Curlsmith, including whether acquisition-related sales translate into sustainable margin improvement.
- Resolution and potential financial impact of the Brita patent and ITC proceedings.