Helen of Troy Limited: Fiscal 2017 Second-Quarter Form 10-Q
Business Context and Reporting Period
Helen of Troy Limited is a Bermuda-based global designer, importer, marketer and distributor of consumer products across four segments: Housewares, Health & Home, Nutritional Supplements and Beauty. The filing covers the three and six months ended August 31, 2016, compared with the corresponding periods ended August 31, 2015. The business is seasonal, with historically highest sales and operating income in the third fiscal quarter.
The company acquired Hydro Flask on March 18, 2016, for approximately $209.26 million in cash. Hydro Flask contributed $29.06 million of second-quarter revenue and $43.43 million of year-to-date revenue.
Financial Performance and Liquidity
| Metric | Three Months Ended August 31, 2016 | Year-over-Year Change | Six Months Ended August 31, 2016 | Year-over-Year Change |
|---|---|---|---|---|
| Net sales | $368.17 million | Down 0.3% | $716.11 million | Up 0.2% |
| Gross profit | $162.97 million | Up 10.1% | $315.40 million | Up 8.3% |
| Gross margin | 44.3% | Up 4.2 points | 44.0% | Up 3.2 points |
| Operating income | $37.49 million | Up 15.6% | $60.39 million | Up 2.4% |
| Operating margin | 10.2% | Up 1.4 points | 8.4% | Up 0.1 point |
| Net income | $28.36 million | Up 16.0% | $47.38 million | Up 5.6% |
| Diluted EPS | $1.00 | Up $0.16 | $1.68 | Up $0.14 |
| Cash flow from operations | Not separately provided | — | $85.68 million | Up from $52.21 million |
Adjusted operating margin was 13.0% for the quarter and 12.9% year to date, compared with 11.2% in both prior-year periods. Adjusted diluted EPS was $1.31 for the quarter and $2.59 year to date, compared with $1.12 and $2.17, respectively. These are non-GAAP measures that exclude specified impairment, litigation, amortization and share-based compensation items.
At August 31, 2016, cash and cash equivalents were $25.81 million, compared with $225.80 million at February 29, 2016. Current assets were $580.32 million and current liabilities were $296.36 million, producing working capital of $283.96 million and a current ratio of 2.0 to 1.
Total debt was $548.56 million, including $479.03 million under the revolving credit agreement, compared with $619.91 million at February 29, 2016. The $650 million revolving facility had $166.50 million of remaining borrowing availability, after considering outstanding borrowings and letters of credit. The company was in compliance with its debt covenants. Debt to ending equity was 55.3%, compared with 52.1% in the prior comparable period.
Investing activities used $219.44 million, primarily due to the Hydro Flask acquisition. Financing activities used $66.23 million, reflecting net repayment of borrowings and debt repayment. No open-market share repurchases occurred during the six months; only 5,274 shares were acquired in connection with share-based compensation settlements.
Material Changes Versus the Prior Comparable Period
- Core business sales declined 8.1% in the quarter and 5.9% year to date, while Hydro Flask and other acquisition-related contributions offset much of the decline.
- Housewares revenue increased 34.4% in the quarter and 32.3% year to date, including Hydro Flask revenue. Housewares operating income rose 60.0% in the quarter and 50.9% year to date.
- Health & Home revenue increased 0.8% in the quarter and 1.6% year to date. Operating income increased 95.4% in the quarter and 43.7% year to date, helped by product cost reductions, mix and lower advertising and freight costs.
- Nutritional Supplements revenue declined 13.0% in the quarter and 10.9% year to date. The segment reported operating losses of $1.23 million for the quarter and $6.50 million year to date, compared with operating income in the prior periods, reflecting lower demand and increased investment in online growth and customer acquisition.
- Beauty revenue declined 22.3% in the quarter and 19.8% year to date. Operating income declined 46.5% in the quarter and 41.1% year to date, due to lower volumes, retail weakness, competitive pressures, foreign exchange and the Venezuelan currency change.
- Gross margin improved substantially from favorable product mix, product rationalization, lower product costs and Hydro Flask accretion. SG&A increased to 34.1% of sales in the quarter and 34.6% year to date, driven by compensation, share-based compensation, severance and reduced operating leverage.
- Interest expense increased 54.5% in the quarter and 39.4% year to date because of higher average debt and interest rates.
- The weighted-average diluted share count declined to 28.22 million in the quarter and 28.19 million year to date, from 28.99 million and 29.04 million, respectively.
Outlook, Commentary, Risks and Unusual Items
- Management stated that Hydro Flask was on track to exceed expectations, supported by new products, increased shelf space, distribution gains and e-commerce and specialty-channel expansion.
- Management expects longer-term Housewares growth from new products, category expansion, expanded retail assortments and international distribution. Beauty conditions were expected to remain challenging for the balance of fiscal 2017.
- Retail conditions were uncertain because of declining brick-and-mortar traffic, retailer inventory rationalization, pressure for supplier margin improvement, the growth of internet channels, the U.S. election and Brexit. Internet-based customers represented approximately 13.5% of quarterly sales and 12.2% of year-to-date sales, versus 10.1% and 9.9% in the prior periods.
- Venezuela adopted the DICOM exchange rate. Venezuelan revenue fell to $0.14 million in the quarter and $0.37 million year to date, from $5.93 million and $10.04 million, respectively. Management stated that U.S.-dollar reported Venezuelan results would no longer be meaningful at the prevailing exchange rate.
- The company recorded $7.40 million of non-cash intangible asset impairment charges in the first quarter, relating to Beauty and Nutritional Supplements brand assets. It also recorded a $1.47 million patent litigation charge related to the Exergen thermometer case and appealed the judgment in July 2016.
- Key risks include foreign currency volatility, particularly in Venezuela and China-related supply exposure; floating-rate debt; retail and discretionary consumer demand; dependence on foreign manufacturing; product liability and warranty claims; acquisition integration; goodwill and intangible-asset impairment; litigation; information systems and cybersecurity; and covenant or liquidity constraints.
- Management represented that operating cash flow and available financing sources should provide sufficient capital for foreseeable requirements, including inventory, receivables and potential acquisitions. The filing provides no specific earnings or revenue guidance range.
- The company adopted accounting guidance affecting share-based compensation, deferred taxes and debt issuance costs. The filing states that the cumulative and overall effects were not material, although share-based compensation expense and tax benefits changed reported results.
Important Facts for Investors to Verify
- Whether Hydro Flask’s growth and margins offset weakness in the core business and support the company’s acquisition strategy.
- Whether Beauty and Nutritional Supplements sales and profitability stabilize, including the effect of Venezuelan currency translation and retail channel pressure.
- The sustainability of the gross-margin improvement after adjusting for product mix, rationalization and Hydro Flask acquisition benefits.
- Debt repayment requirements, floating-rate exposure, covenant headroom and the $166.50 million of available revolver capacity.
- The potential outcome and financial exposure from the Exergen patent litigation appeal.
- Whether additional impairment charges may arise from the company’s substantial goodwill and intangible asset balances.
- Working-capital trends, particularly inventory of $317.50 million and the seasonal cash demands associated with the company’s peak third quarter.
- The effect of foreign exchange movements, Brexit-related economic weakness and continued changes in international retail demand.