Helen of Troy Limited — Fiscal 2019 Form 10-K
Reporting period: Fiscal year ended February 28, 2019. The filing is an annual report rather than a standalone fiscal fourth-quarter filing; quarterly data are included. Helen of Troy operates through Housewares, Health & Home, and Beauty. The former Nutritional Supplements segment was divested in December 2017 and is reported as discontinued operations.
Financial Performance and Position
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net sales | $1,564.2 million | $1,478.8 million | +5.8% |
| Gross profit / margin | $641.1 million / 41.0% | $611.2 million / 41.3% | Margin down 0.3 pts |
| Operating income / margin | $199.4 million / 12.7% | $169.1 million / 11.4% | +17.9%; margin up 1.3 pts |
| Adjusted operating income / margin | $239.2 million / 15.3% | $223.9 million / 15.1% | +6.9%; margin up 0.2 pts |
| Income from continuing operations | $174.2 million | $128.9 million | +35.2% |
| Diluted EPS from continuing operations | $6.62 | $4.73 | +40.0% |
| Net income | $168.5 million | $44.4 million | +279.2% |
| Operating cash flow from continuing operations | $200.6 million | $218.6 million | Down $18.0 million |
| Capital and intangible expenditures | $26.4 million | $13.6 million | Up $12.8 million |
- Segment sales: Housewares grew 14.1% to $523.8 million; Health & Home grew 3.1% to $695.2 million; Beauty declined 0.2% to $345.1 million.
- Segment operating margins: Housewares was 19.2%, Health & Home 9.8%, and Beauty 8.7%. Beauty’s adjusted operating income declined 14.6%, primarily due to weakness in Personal Care.
- Leadership Brands: Sales increased 8.9% to $1.244 billion, while all other sales declined 4.8%.
- Balance sheet: Cash and equivalents were $11.9 million, working capital was $292.8 million, total assets were $1.650 billion, and stockholders’ equity was $996.6 million.
- Debt and liquidity: Total long-term debt, including current maturities, was approximately $320.8 million. The company had a $1.0 billion unsecured revolving facility, $301.2 million of revolving borrowings, $9.0 million of letters of credit, and $689.8 million of stated borrowing availability at year-end.
- Leverage and liquidity metrics: Ending debt-to-equity was 32.2%, the current ratio was 1.9 to 1, and the company reported compliance with its debt covenants.
- Capital returns: The company repurchased and retired 1.934 million shares for $217.5 million during fiscal 2019. No cash dividends have been paid since inception; $110.5 million remained available under the repurchase authorization at February 28, 2019.
Material Changes Versus Fiscal 2018
- Sales growth was led by Housewares, online channels, incremental distribution, international sales, and new product introductions. Online-related sales represented approximately 19% of consolidated sales, up from 16%.
- Gross margin declined because of channel and product mix, a higher proportion of direct-import shipments, and tariffs, partly offset by Leadership Brand growth.
- Operating income benefited from the absence of fiscal 2018 charges, including $15.4 million of non-cash Beauty trademark impairments and a $3.6 million Toys “R” Us bankruptcy charge. Fiscal 2019 included $3.6 million of restructuring charges.
- Adjusted operating margin improved modestly, indicating underlying operating improvement after excluding specified unusual and non-cash items.
- Income taxes were $13.8 million, or 7.3% of pretax income, compared with $26.6 million, or 17.1%, in fiscal 2018. The prior year included a $17.9 million provisional charge related to the U.S. Tax Cuts and Jobs Act.
- Operating cash flow declined primarily because of increased inventory investment and a $15.0 million patent litigation settlement payment, despite higher continuing-operations earnings.
- Discontinued operations generated a $5.7 million loss, compared with an $84.4 million loss in fiscal 2018. The fiscal 2019 loss included a $5.8 million pretax reduction in the estimated supplemental payment from the Nutritional Supplements divestiture and other contingency charges.
Guidance, Outlook, Risks and Unusual Items
- Transformation strategy: Phase I of the five-year transformation was completed in fiscal 2019. Phase II begins in fiscal 2020 and emphasizes organic sales growth, margin expansion, Leadership Brand investment, international expansion, acquisitions, shared-service efficiencies, and capital deployment.
- Project Refuel: Management targets annualized profit improvements of approximately $8 million to $10 million. The plan is expected to conclude in fiscal 2020, with total restructuring charges estimated at approximately $7 million; $5.4 million had been incurred through fiscal 2019.
- Potential divestiture: On March 11, 2019, the company announced that it was exploring the sale of its Personal Care business, including Pert, Brut, Sure, and Infusium. No completed transaction or definitive financial impact is disclosed in this filing.
- Tariffs: China-related tariffs reduced fiscal 2019 gross profit by approximately $4.0 million on an unmitigated basis. Pricing actions became partially effective in the fourth quarter and were expected to continue into the first quarter of fiscal 2020, but could affect consumer demand and customer orders.
- Supply-chain concentration: Approximately 74% of finished goods purchased were manufactured in the Far East, principally China. Risks include tariffs, trade restrictions, currency movements, supplier disruption, transportation delays, and raw-material cost inflation.
- Customer concentration: Walmart and Amazon each represented approximately 16% of fiscal 2019 sales; Target represented approximately 10%. The top five customers represented approximately 51% of sales.
- Other risks: The filing highlights exposure to retail and discretionary consumer demand, weather and cold/flu seasonality, foreign currency and floating interest rates, licensed trademarks, product liability and recalls, cybersecurity, tax-law changes, Brexit, and potential goodwill or intangible-asset impairment.
- Accounting and controls: The company adopted ASC 606 retrospectively; the adoption did not materially affect reported results. Management and Grant Thornton concluded that internal control over financial reporting was effective, and the financial statement audit opinion was unqualified.
Facts Investors Should Verify
- Whether fiscal 2020 tariff pricing actions fully offset cost increases without reducing retail consumption or orders.
- Progress, total cost, and realized savings from Project Refuel.
- Status and financial consequences of the proposed Personal Care divestiture.
- Inventory growth, working-capital usage, and conversion of earnings into operating cash flow.
- Debt repayment, covenant headroom, floating-rate exposure, and availability under the revolving credit facility.
- Sustainability of Leadership Brand growth and the continuing decline or stabilization of non-Leadership and Personal Care sales.
- Customer concentration, online-channel growth, and dependence on Far East manufacturing and major retailers.
- Potential effects of Macau tax changes, Bermuda and Barbados economic-substance requirements, and unresolved tax positions totaling approximately $3.2 million.