Helen of Troy Limited: Q1 Fiscal 2020 Form 10-Q Summary
Reporting period: Three months ended May 31, 2019. The filing identifies this as the first quarter of fiscal 2020, with comparison to the three months ended May 31, 2018. Helen of Troy is a Bermuda-based global consumer-products company operating in Housewares, Health & Home, and Beauty. Nutritional Supplements is reported as discontinued operations.
Financial Performance and Position
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $376.3 million | $354.7 million | Up 6.1% |
| Gross profit | $153.7 million | $146.6 million | Up 4.9% |
| Gross margin | 40.8% | 41.3% | Down 0.5 percentage points |
| Operating income | $47.2 million | $43.3 million | Up 9.0% |
| Operating margin | 12.5% | 12.2% | Up 0.3 percentage points |
| Income from continuing operations | $40.7 million | $38.2 million | Up 6.6% |
| Net income | $40.7 million | $37.8 million | Up 7.7% |
| Diluted EPS from continuing operations | $1.61 | $1.43 | Up 12.6% |
| Operating cash flow | $15.7 million | $28.9 million | Down $13.2 million |
Adjusted operating income, a non-GAAP measure excluding restructuring charges, intangible amortization, and non-cash share-based compensation, increased 6.9% to $59.3 million. Adjusted operating margin increased to 15.8% from 15.6%. Adjusted diluted EPS from continuing operations increased to $2.06 from $1.87.
Segment Results
| Segment | Q1 FY2020 Sales | Year-over-year sales change | Operating income | Operating margin |
|---|---|---|---|---|
| Housewares | $144.9 million | Up 23.6% | $31.2 million | 21.5% |
| Health & Home | $154.9 million | Down 5.2% | $15.1 million | 9.7% |
| Beauty | $76.5 million | Up 3.4% | $1.0 million | 1.2% |
Leadership Brand sales rose 7.4% to $301.6 million. Online-related sales represented approximately 23% of consolidated sales, compared with 19% in the prior-year quarter, and grew approximately 28% year over year.
Liquidity, Debt, and Capital Resources
- Cash and cash equivalents were $18.4 million at May 31, 2019, compared with $11.9 million at February 28, 2019.
- Working capital was $346.9 million and the current ratio was 2.2:1.
- Total long-term debt was $321.1 million, including $303.2 million outstanding under the revolving credit agreement and $20.4 million under the MBFC Loan, before applicable financing-fee adjustments.
- The revolving credit facility had a $1.0 billion commitment, $687.8 million of borrowing availability, and $9.0 million of outstanding letters of credit.
- The company was in compliance with its debt covenants. Debt agreements require a minimum interest coverage ratio of 3.00:1 and generally limit leverage to 3.50:1, subject to a higher limit for a qualified acquisition.
- Investing cash use was $3.7 million, primarily for capital and intangible asset expenditures. Financing activities used $5.5 million, including $8.8 million of share repurchases or employee net exercises.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by Housewares, online channels, new products, and higher Leadership Brand sales. Health & Home declined because of lower international sales and unfavorable comparisons with the prior year’s stronger cough/cold/flu season.
- Gross margin declined because of higher tariffs on China-sourced products, unfavorable foreign exchange, and higher freight costs. Management stated that pricing actions were intended to offset the tariff impact.
- SG&A as a percentage of sales improved to 28.1% from 28.6%, reflecting pricing actions, foreign-exchange benefits, operating leverage, and lower product-liability claim expense. These benefits were partly offset by higher incentive compensation, share-based compensation, product development, and advertising costs.
- Interest expense increased 23.1% to $3.3 million due to higher average debt and higher average interest rates.
- Operating cash flow declined primarily because of increased inventory investment, including inventory built for risk management during supplier consolidations and distribution-center integration.
- Restructuring charges declined to $0.6 million from $1.7 million. Project Refuel targets annualized profit improvements of approximately $8 million to $10 million and is expected to be completed in fiscal 2020.
- The company adopted ASC 842. At March 1, 2019, it recognized approximately $37.1 million of operating lease assets and $47.2 million of lease liabilities. The adoption did not materially affect earnings or cash flows.
- The formal process to divest the Personal Care business was discontinued on May 21, 2019; management intends to continue operating the business.
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, continued investment in Leadership Brands, international expansion, acquisitions, operating efficiency, and capital deployment. The filing does not provide a specific consolidated fiscal-year revenue or earnings guidance figure.
- Tariffs: The company sources a high concentration of products from China. List 3 tariffs increased from 10% to 25% during the quarter, and additional List 4 tariffs had been proposed. Pricing actions may mitigate costs but could reduce retail consumption or customer orders.
- Foreign exchange: Currency movements reduced reported sales by approximately $2.5 million, or 0.7%, compared with a favorable impact in the prior-year quarter.
- Seasonality and demand: Sales and operating income are historically highest in the third fiscal quarter. Health & Home results are sensitive to winter weather and cough/cold/flu activity.
- Supply chain: Dependence on foreign manufacturers, particularly in China, creates exposure to tariffs, shipping disruptions, labor availability, lead times, and freight costs.
- Tax matters: The effective tax rate was 7.6%, compared with 6.2% in the prior-year quarter. The filing identifies a future potential increase in Macau taxation beginning in calendar 2021 and uncertainty regarding the U.K. ORIP tax rules.
- Share repurchases: The board authorized up to $400 million of repurchases through May 2022. Approximately $394.4 million remained available at May 31, 2019.
- Contingencies: The company is involved in ordinary-course legal matters and believes they will not materially affect financial position, results, or liquidity. A $15.0 million patent dispute settlement was paid in May 2018 and was accrued in prior periods.
- Intangible assets: No impairment charges were recorded. Following the decision to retain Personal Care, $30.4 million of related trademarks were reclassified from indefinite-lived to finite-lived assets and are expected to be fully amortized by fiscal 2027.
Important Facts for Investors to Verify
- Whether tariff-related pricing actions fully offset increased product and freight costs without weakening demand or customer orders.
- Inventory levels, working-capital conversion, and whether operating cash flow recovers after the quarter’s inventory build.
- Health & Home sales and margins, including the effect of cough/cold/flu season comparisons and international demand.
- Debt leverage, floating-rate exposure, covenant headroom, and the potential cash requirements of the $400 million repurchase authorization.
- The timing and total cost of Project Refuel and whether its targeted annualized savings are achieved.
- The effects of Macau tax changes, U.K. ORIP rules, Brexit-related developments, and other international tax or regulatory changes.
- The sustainability of adjusted results after excluding restructuring charges, intangible amortization, and share-based compensation.
- Management’s future guidance, which is not provided as a specific consolidated fiscal-year revenue or earnings target in this filing.