HELEN OF TROY LTD quarterly report, Q3 FY2020

Helen of Troy Limited: Q3 Fiscal 2020 Form 10-Q Summary

Business context and reporting period

Helen of Troy is a Bermuda-domiciled global consumer products company operating through Housewares, Health & Home, and Beauty. Key brands include OXO, Honeywell, Braun, PUR, Hydro Flask, Vicks, and Hot Tools. The filing covers the quarter and nine months ended November 30, 2019, representing the third quarter of fiscal 2020. The business is seasonal, with the third fiscal quarter historically generating its highest sales and operating income. Results exclude the Nutritional Supplements business, which was divested in December 2017 and presented as discontinued operations.

Key financial metrics

Metric	Q3 FY2020	Q3 FY2019	Change
Net sales	$474.7 million	$431.1 million	+10.1%
Gross profit	$210.0 million	$181.8 million	+15.5%
Gross margin	44.2%	42.2%	+2.0 percentage points
Operating income	$79.3 million	$61.3 million	+29.3%
Operating margin	16.7%	14.2%	+2.5 percentage points
Income from continuing operations	$68.7 million	$54.3 million	+26.5%
Diluted EPS from continuing operations	$2.71	$2.06	+31.6%
Net income	$68.7 million	$49.5 million	+38.9%

For the nine months ended November 30, 2019, sales were $1.265 billion, up 7.3%; operating income was $181.0 million, up 16.6%; operating margin was 14.3% versus 13.2%; income from continuing operations was $155.5 million, up 13.9%; and diluted EPS from continuing operations was $6.15 versus $5.15.

Non-GAAP adjusted operating income increased 27.8% to $90.3 million in the quarter, with adjusted operating margin of 19.0% versus 16.4%. Adjusted diluted EPS from continuing operations was $3.12 versus $2.40. For the nine-month period, adjusted operating income was $215.4 million and adjusted diluted EPS was $7.42. These measures exclude specified items and are not GAAP measures.

Q3 segment sales: Housewares $183.2 million, up 28.2%; Health & Home $185.8 million, down 1.1%; Beauty $105.7 million, up 5.4%.
Q3 segment operating margins: Housewares 23.1%, Health & Home 13.1%, and Beauty 11.9%.
Leadership Brand sales increased 10.6% in Q3 to $379.6 million and 7.3% year to date to $1.012 billion.
Online-related sales represented approximately 24% of consolidated sales in both the quarter and nine-month period, growing 30% and 28%, respectively, year over year.
Nine-month operating cash flow was $101.4 million, compared with $109.5 million in the prior-year period. Capital and intangible asset expenditures were $13.2 million versus $22.2 million.
Cash and cash equivalents were $19.6 million at November 30, 2019, compared with $11.9 million at February 28, 2019.
Working capital was $411.3 million, the current ratio was 2.3:1, and ending debt-to-equity was 21.0% versus 32.9% at the prior comparable period.
Total long-term debt was $244.2 million, including $225.8 million of revolving credit borrowings excluding prepaid financing fees. The company had $765.2 million of available revolver capacity, subject to covenant limitations.

Material changes versus the prior comparable period

Housewares was the principal growth driver, benefiting from existing customer point-of-sale growth, expanded distribution, online sales, international sales, club sales, and new products.
Health & Home sales declined because of distribution changes and unfavorable comparisons with prior-year wildfire and cough/cold/flu activity; however, segment operating margin improved.
Beauty sales increased, led by appliances and online and international channels, but personal care weakness and higher expenses reduced the reported segment margin.
Gross margin benefited from a higher Housewares mix, favorable product and channel mix, tariff exclusion refunds, and a lower direct-import mix. Tariffs and related pricing actions remained a net margin headwind.
SG&A increased 8.4% in Q3, but declined to 27.5% of sales from 28.0%, reflecting lower advertising expense, operating leverage, tariff-related pricing actions, and favorable foreign-exchange effects. Higher incentive compensation, amortization, freight, and acquisition costs partly offset these benefits.
The company recorded $1.5 million of acquisition-related expenses in the quarter and $1.1 million of restructuring charges in the nine-month period. Cumulative Project Refuel restructuring costs reached $6.5 million, with approximately $0.5 million remaining liability.
Interest expense declined in Q3 because of lower average debt and rates, but increased for the nine-month period because of higher average interest rates.
Weighted-average diluted shares declined to 25.4 million in Q3 from 26.4 million, supporting EPS growth. The company repurchased or retired 6,509 shares during the quarter through equity-award net exercises; no open-market repurchases were reported in the quarter.
Adoption of ASC 842 on March 1, 2019 added approximately $37.1 million of operating lease assets and $47.2 million of lease liabilities, without a material effect on earnings or cash flow.

Guidance, outlook, commentary, risks, and unusual items

Management described fiscal 2020 as the beginning of Phase II of its transformation strategy, focused on organic sales growth, margin expansion, investment in Leadership Brands, international growth, operating efficiency, and acquisitions. The filing text does not provide a clear numerical full-year sales or EPS guidance figure.

On December 19, 2019, the company agreed to acquire Drybar Products LLC for $255.0 million in cash, subject to customary adjustments and closing conditions. The transaction was expected to close by January 31, 2020 and was to be funded with cash and revolver borrowings.
Project Refuel is expected to be completed in fiscal 2020, with targeted annualized profit improvement of approximately $8 million to $10 million and total restructuring charges of approximately $7 million.
Tariff exposure remains significant because of the company’s concentration of sourcing in China. Management expects to mitigate tariffs through pricing and supply-chain cost reductions, but cautioned that pricing may not fully offset costs or could reduce consumer demand and customer orders.
Foreign exchange reduced reported Q3 sales by approximately $2.3 million and nine-month sales by approximately $6.8 million. The company uses currency and interest-rate derivatives for hedging.
The Macau tax holiday is expected to end after calendar 2020; the Macau subsidiary may become subject to an approximately 12% statutory corporate income tax beginning in 2021. The ultimate effect on the effective tax rate cannot yet be determined.
Other risks include discretionary consumer demand, dependence on major retailers, foreign manufacturing and supply-chain disruptions, weather and cough/cold/flu season variability, tariffs, foreign exchange, Brexit and U.K. tax changes, product liability, litigation, cybersecurity, tax disputes, acquisitions, and potential goodwill or intangible-asset impairment.
The company stated that it was in compliance with its debt covenants at November 30, 2019. Its revolving credit agreement matures December 7, 2021, while the MBFC Loan has scheduled principal payments through March 2023.
Management believes operating cash flow and available financing are sufficient for foreseeable liquidity needs, including the pending Drybar acquisition. The filing reports no material off-balance-sheet financing arrangements.

Most important facts for investors to verify

Whether the Drybar acquisition closed on the expected timetable and its effect on leverage, cash flow, sales, and Beauty segment performance.
The durability of Q3 margin expansion after considering tariff costs, pricing actions, freight, incentive compensation, amortization, and acquisition-related expenses.
Whether Health & Home can return to growth after its nine-month sales decline and whether Beauty can offset personal care weakness.
The company’s post-acquisition debt balance, covenant headroom, interest-rate exposure, and remaining revolver availability.
The cash-conversion impact of elevated receivables and inventory; nine-month operating cash flow declined despite higher earnings.
The ultimate impact of tariffs, Brexit-related developments, the Macau tax change, and foreign-currency movements.
The reconciliation and recurring nature of management’s non-GAAP adjusted results, particularly the treatment of amortization, share-based compensation, restructuring, and acquisition expenses.