Helen of Troy Limited — Form 10-Q Summary
Business Context and Reporting Period
Helen of Troy is a global consumer products company operating through Housewares, Health & Home, and Beauty segments. The filing covers the quarter and six months ended August 31, 2020, the second quarter and first six months of fiscal 2021, with comparisons to the corresponding fiscal 2020 periods.
The company sells brands including OXO, Honeywell, Braun, PUR, Hydro Flask, Vicks, Hot Tools, and Drybar. The business is seasonal, with historically higher sales and operating income in the fiscal third quarter.
Key Financial Metrics
| Metric | Three Months Ended August 31 | Six Months Ended August 31 |
|---|---|---|
| Net sales | $530.9 million, up 28.2% | $951.7 million, up 20.4% |
| Gross profit | $230.3 million | $409.6 million |
| Gross margin | 43.4%, versus 43.0% | 43.0%, versus 42.0% |
| Operating income | $99.3 million, up 82.1% | $156.3 million, up 53.6% |
| Operating margin | 18.7%, versus 13.2% | 16.4%, versus 12.9% |
| Net income | $87.3 million, up 89.5% | $147.6 million, up 70.1% |
| Diluted EPS | $3.43, versus $1.83 | $5.81, versus $3.44 |
| Adjusted diluted EPS | $3.77, versus $2.24 | $6.30, versus $4.30 |
Six-month operating cash flow was $186.3 million, compared with $38.2 million in the prior-year period. Capital and intangible asset expenditures were $15.2 million, compared with $8.9 million. Financing activities used $47.1 million, resulting in a $123.9 million increase in cash and cash equivalents to $148.4 million at August 31, 2020.
At August 31, 2020, current assets were $951.9 million and current liabilities were $500.3 million, producing working capital of $451.6 million and a current ratio of 1.9 to 1. Inventory was $350.2 million and receivables were $402.0 million.
Total long-term debt was $300.1 million, including $281.6 million under the revolving credit agreement and $18.5 million under the MBFC Loan. The revolving facility was amended in March 2020 to increase commitments from $1.0 billion to $1.25 billion and extend maturity to March 13, 2025. Borrowing availability was $955.0 million, including the effect of $9.0 million of outstanding letters of credit. The company was in compliance with its debt covenants.
Segment Performance and Material Changes
- Housewares: Second-quarter sales increased 20.3% to $201.9 million; operating income increased to $45.4 million and operating margin rose to 22.5%. Growth reflected demand for OXO and Hydro Flask products, online sales, club-channel sales, international growth, and new products.
- Health & Home: Second-quarter sales increased 33.2% to $211.5 million; operating income increased to $33.8 million and operating margin rose to 16.0%. Demand for healthcare, healthy-living, thermometry, filtration, and air-purification products benefited from COVID-19 and wildfire activity.
- Beauty: Second-quarter sales increased 34.6% to $117.5 million; operating income increased to $20.1 million and operating margin rose to 17.1%. Results included $10.5 million of Drybar sales and organic growth in appliances, club-channel distribution, and international sales, partly offset by declines in Personal Care.
- Drybar acquisition: The company acquired Drybar Products on January 23, 2020, for approximately $255.9 million in cash. Drybar contributed $10.5 million of second-quarter sales and $18.1 million of six-month sales; there was no comparable prior-year contribution.
- Non-core Personal Care divestiture: Assets associated with certain mass-channel brands, including Pert, Brut, Sure, and Infusium, were classified as held for sale. Assets held for sale totaled $41.0 million at August 31, 2020, and the divestiture was expected during fiscal 2021.
- Leadership Brands and digital channels: Leadership Brand sales increased 30.3% in the quarter and 23.3% year to date. Sales to retail customers fulfilling online orders and direct-to-consumer online sales represented approximately 24% of quarterly sales and 26% of year-to-date sales, each growing approximately 32% year over year.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide a clear new numerical sales or earnings guidance range. Management stated that operating cash flow and available financing were expected to be sufficient for foreseeable liquidity requirements, while continuing to evaluate acquisitions and potential share repurchases.
COVID-19 had a net favorable effect on the first two quarters, driven by demand for healthcare, healthy-living, home-use, and online products. However, store closures, lower traffic, weaker discretionary demand, supply-chain constraints, carrier delays, and product out-of-stocks remained significant risks. Demand for thermometry, air filtration, water filtration, and certain Housewares products exceeded recently increased supply capacity in some cases.
Temporary COVID-19 cost-control measures were implemented in the first quarter, including salary and director compensation reductions, hiring restrictions, furloughs, reduced marketing and travel, and deferred capital spending. During the second quarter, wages, salaries, and director compensation were restored, and investment in marketing, product development, launches, and capital expenditures was increased. Some other measures remained in place.
The six-month effective tax rate was unusually low at 1.6%, compared with 9.0% in the prior-year period, primarily because the CARES Act generated a $9.4 million tax benefit and other discrete tax benefits. The company reached an agreement in principle in September 2020 to settle a $6.0 million state tax assessment for $0.5 million. Macau tax-law changes are expected to increase the annual effective tax rate by approximately 1.5 to 2.0 percentage points beginning in fiscal 2022.
Project Refuel restructuring charges were $0.4 million for the six months, with approximately $9.1 million incurred since inception. The company expects the plan to be completed in fiscal 2021 and targets total annualized profit improvements of approximately $9.0 million to $11.0 million.
Additional risks include tariffs and supply concentration in China, foreign-currency volatility, retailer and customer concentration, potential impairment of goodwill and intangible assets, acquisition and divestiture execution, product liability, cybersecurity, tax disputes, and floating-rate debt exposure. Interest-rate swaps effectively fixed rates on $225.0 million of revolving debt.
Investor Verification Checklist
- Verify whether COVID-19-related demand benefits, online growth, and elevated product demand persist after normalization of retail traffic and consumer behavior.
- Assess inventory, receivables, accounts payable, and working-capital trends, particularly the $350.2 million inventory balance and supply-chain constraints.
- Monitor Drybar integration, Beauty segment performance, and the timing and economics of the planned Personal Care divestiture.
- Reconcile GAAP results with adjusted results, including amortization, share-based compensation, restructuring, and the six-month tax benefit.
- Review debt covenant compliance, the $955.0 million borrowing availability, floating-rate exposure, and the callable MBFC Loan.
- Evaluate the effect of Macau tax-law changes, tariffs, foreign exchange, and potential future goodwill or intangible-asset impairment.
- Confirm the company’s formal fiscal 2021 guidance, as no clear numerical guidance range is provided in the filing text.