Business Context and Reporting Period
Helen of Troy Limited is a Bermuda-based global consumer products company operating through Housewares, Health & Home, and Beauty. This Form 10-Q covers the three months ended May 31, 2020, the first quarter of fiscal 2021, compared with the three months ended May 31, 2019. The quarter included a full quarter of Drybar Products results following its January 23, 2020 acquisition.
Key Financial Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $420.8 million | $376.3 million | +11.8% |
| Gross profit | $179.3 million | $153.7 million | +16.6% |
| Gross margin | 42.6% | 40.8% | +1.8 percentage points |
| Operating income | $57.0 million | $47.2 million | +20.7% |
| Operating margin | 13.5% | 12.5% | +1.0 percentage point |
| Net income | $60.3 million | $40.7 million | +48.1% |
| Diluted EPS | $2.37 | $1.61 | +47.2% |
| Operating cash flow | $92.8 million | $15.7 million | + $77.2 million |
Adjusted operating income, a non-GAAP measure, increased 19.8% to $71.1 million, with adjusted operating margin of 16.9% versus 15.8%. Adjusted net income increased 23.2% to $64.2 million, and adjusted diluted EPS increased 22.8% to $2.53. These measures exclude specified items including amortization, share-based compensation, restructuring charges, and certain tax effects.
Segment Performance
| Segment | Net Sales | Sales Change | Operating Income | Operating Margin |
|---|---|---|---|---|
| Housewares | $140.6 million | -3.0% | $23.2 million | 16.5% |
| Health & Home | $200.0 million | +29.1% | $31.5 million | 15.8% |
| Beauty | $80.3 million | +5.0% | $2.2 million | 2.8% |
Leadership Brand sales increased 15.7% to $349.0 million. Online-related sales represented approximately 28% of consolidated sales, up from 23% in the prior-year quarter, and increased approximately 33% year over year.
Liquidity, Cash Flow, Debt, and Balance Sheet
- Cash and cash equivalents were $88.5 million at May 31, 2020, compared with $24.5 million at February 29, 2020.
- Working capital was $391.1 million, and the current ratio was 2.1:1.
- Operating activities generated $92.8 million; investing activities used $6.5 million, principally for capital and intangible asset expenditures; financing activities used $22.3 million.
- Total debt was $324.9 million, including $306.3 million under the revolving credit agreement and $18.5 million under the MBFC Loan.
- The revolving credit facility was amended in March 2020: commitment capacity increased from $1.0 billion to $1.25 billion, the maturity was extended to March 13, 2025, and the accordion increased from $200 million to $300 million.
- At May 31, 2020, $930.0 million was available under the revolving facility, subject to applicable borrowing and covenant limitations. The company reported compliance with all debt covenants.
- Interest rate swaps effectively fixed rates on $225.0 million of revolving debt. Debt remains exposed to floating-rate movements on the unhedged portion.
Material Changes Versus the Prior Comparable Period
- Health & Home sales increased 29.1%, primarily due to COVID-19-related demand for healthcare, healthy-living, and at-home products.
- Housewares sales declined 3.0% because of brick-and-mortar closures, weaker international sales, unfavorable product mix, tariffs, and higher fulfillment costs, despite stronger online demand.
- Beauty sales increased 5.0%, including $7.6 million from Drybar, but organic Beauty sales declined 1.5% due to store closures, discretionary demand pressure, a product supply constraint, and foreign exchange effects.
- Foreign currency reduced reported sales by approximately $4.8 million, or 1.3%.
- Gross margin benefited from product and channel mix, Drybar, and lower air freight expense. SG&A as a percentage of sales increased to 29.0% from 28.1%, reflecting foreign exchange, freight, bad debt, product liability, and incentive compensation costs, partly offset by temporary cost reductions.
- Net income benefited substantially from a $9.4 million discrete tax benefit related to the CARES Act, as well as other discrete tax benefits. The filing cautions that this benefit is not indicative of recurring tax performance.
- Cash flow improved primarily because of higher earnings, increased accounts payable, and lower inventory-related cash usage.
Outlook, Commentary, Risks, and Unusual Items
- Management stated that favorable COVID-19 effects outweighed unfavorable effects in the quarter, but warned that the situation was changing rapidly and could materially adversely affect demand, supply chains, liquidity, cash flows, and results.
- Temporary COVID-19 measures included salary and director compensation reductions, hiring and merit-increase suspensions, furloughs, reduced temporary labor, marketing and travel reductions, deferred product development, and lower noncritical capital expenditures.
- The filing does not provide a clear formal full-year sales or earnings guidance range. Management continues to support the long-term Phase II transformation strategy, including Leadership Brand investment, international expansion, margin improvement, operating efficiency, and strategic acquisitions.
- The company expects to complete Project Refuel restructuring during fiscal 2021. It recorded $0.3 million of restructuring charges in the quarter, incurred $9.0 million cumulatively, and had a remaining liability of $0.5 million.
- Assets associated with the mass-market personal care business, including Pert, Brut, Sure, and Infusium, were classified as held for sale. The company expects the divestiture during fiscal 2021; assets held for sale totaled $40.8 million at May 31, 2020.
- Macau tax incentives are expected to end after calendar 2020, after which the subsidiary may become subject to an approximately 12% statutory corporate income tax rate. The ultimate effect remains uncertain.
- Key risks include the duration and severity of COVID-19, retail closures, discretionary consumer demand, supply-chain disruption, concentrated sourcing in China, tariffs, foreign exchange, customer concentration, product liability, cybersecurity, acquisition integration, divestiture execution, impairment of goodwill and intangibles, and debt covenant or liquidity constraints.
- Legal proceedings are described as ordinary-course matters that management does not expect to have a material adverse effect.
Important Facts for Investors to Verify
- Separate recurring operating performance from the $9.4 million CARES Act-related tax benefit and other discrete tax items.
- Assess the sustainability of Health & Home demand and online-channel growth after pandemic-related purchasing patterns normalize.
- Monitor Housewares margin pressure from tariffs, freight, chargebacks, product mix, and lower brick-and-mortar sales.
- Track Drybar integration, contribution margins, acquisition-related costs, and the planned personal care divestiture.
- Review available revolver capacity, leverage and interest-coverage compliance, floating-rate exposure, and the callable MBFC Loan.
- Evaluate the potential effect of the Macau tax-holiday expiration and ongoing transfer-pricing analysis.
- Reconcile GAAP results with management’s non-GAAP measures, particularly exclusions for amortization, share-based compensation, restructuring, and tax effects.