Helen of Troy Limited — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended November 30, 2015. The company designs, sources, markets and distributes consumer products through Housewares, Health & Home, Nutritional Supplements and Beauty segments. The business is seasonal, with the third fiscal quarter historically producing the highest sales and operating income.
Financial performance
| Metric | Three months ended Nov. 30, 2015 | Three months ended Nov. 30, 2014 | Nine months ended Nov. 30, 2015 | Nine months ended Nov. 30, 2014 |
|---|---|---|---|---|
| Net sales | $445.5 million | $435.7 million | $1,160.0 million | $1,067.4 million |
| Gross profit margin | 41.0% | 41.6% | 40.8% | 40.7% |
| Operating income | $55.6 million | $65.0 million | $114.6 million | $112.8 million |
| Operating margin | 12.5% | 14.9% | 9.9% | 10.6% |
| Net income | $46.8 million | $55.4 million | $91.6 million | $90.6 million |
| Diluted EPS | $1.63 | $1.92 | $3.17 | $3.12 |
| Operating cash flow | Not separately provided | Not separately provided | $72.8 million | $63.5 million |
Third-quarter sales increased 2.3%, while nine-month sales increased 8.7%. Core-business sales increased 1.6% in the quarter and 3.3% year to date; acquisitions contributed much of the remaining growth. SG&A increased 9.0% in the quarter and 13.8% year to date, raising the SG&A ratio to 28.5% and 30.7%, respectively.
Reported adjusted diluted EPS was $2.07 for the quarter versus $2.17 in the prior year and $4.23 for the nine months versus $4.19. These are non-GAAP measures excluding specified items and should not replace GAAP results.
Segment trends
- Housewares: Sales increased 2.1% in the quarter and 4.3% year to date. Operating income declined 15.0% in the quarter and 7.4% year to date due to promotional and advertising spending, product mix and CEO succession costs.
- Health & Home: Sales increased 5.3% in the quarter and 6.1% year to date, supported by healthcare products and the VapoSteam acquisition. Warmer weather reduced heater demand, while lower cough, cold and flu incidence could affect future replenishment orders.
- Nutritional Supplements: Quarterly sales declined 2.5% and operating income declined 51.2%. Results reflected promotional pricing, lower average order values, reduced print-newsletter activity, increased customer-acquisition spending and newly allocated corporate overhead.
- Beauty: Quarterly sales declined 0.3% but increased 1.3% year to date. Competitive pressure, lost retail distribution and foreign exchange reduced performance. Management did not expect meaningful full-year fiscal 2016 sales growth in this segment.
Liquidity, debt and cash flow
- Cash and cash equivalents were $21.1 million at November 30, 2015, compared with $12.3 million at February 28, 2015.
- Operating activities generated $72.8 million during the first nine months. Investing activities used $55.2 million, including $42.8 million for the VapoSteam acquisition and $12.4 million for capital and intangible expenditures.
- Financing activities used $8.8 million, including $50.0 million for share repurchases. The company repurchased 556,591 shares at an average price of $89.83.
- Total debt was $474.7 million, including $380.9 million outstanding under a $650 million revolving credit facility. Availability was $267.6 million, although debt agreements effectively limited additional borrowing to $254.95 million.
- The company reported a 2.3:1 current ratio, working capital of $386.4 million and an ending debt-to-equity ratio of 49.0%. It was in compliance with debt covenants at November 30, 2015.
Material changes, unusual items and outlook
- On November 12, 2015, the company settled litigation with its former CEO. It issued 276,548 shares, of which 116,012 were tendered back for tax obligations, and recorded $6.71 million of CEO succession costs, or $4.64 million after tax and $0.16 per diluted share.
- The company recorded a $3.0 million non-cash Beauty trademark impairment charge during the first quarter, compared with $9.0 million in the prior-year period.
- The prior-year comparison benefited from a $7.0 million pre-tax gain from amending a trademark license agreement, making year-over-year operating comparisons less favorable.
- The Vicks VapoSteam and VapoPad businesses were acquired on March 31, 2015 for approximately $42.75 million and added to Health & Home.
- Foreign exchange reduced reported sales by approximately $8.8 million in the quarter and $25.1 million year to date. Approximately 16% of quarterly sales and 15% of year-to-date sales were denominated in foreign currencies.
- Management expected Housewares growth to remain in the mid-single digits, anticipated continued internet-channel growth, and expected moderate domestic holiday retail growth. Management stated that cautious consumer sentiment, traditional retail pressure and currency volatility remained concerns.
- Key risks include dependence on discretionary consumer demand and major retailers, foreign manufacturing and supply-chain disruptions, foreign exchange exposure, interest-rate risk on floating-rate debt, potential impairment of goodwill and intangible assets, Venezuelan currency uncertainty, acquisition integration, product liability and regulatory risks in Nutritional Supplements.
- On January 7, 2016, the company extended CEO Julien Mininberg’s employment through February 28, 2019. The agreement includes a $950,000 base salary, incentive compensation opportunities and specified termination and change-of-control benefits.
Investor verification points
- Verify whether sales growth remains positive after separating acquisition contributions, foreign exchange effects and Venezuela-related results.
- Assess whether higher SG&A, promotional spending and customer-acquisition investments translate into sustainable revenue and margin improvement.
- Monitor Health & Home seasonality, cough/cold/flu demand, weather-sensitive products and the integration economics of VapoSteam.
- Review debt covenant headroom, floating-rate exposure, scheduled Senior Notes and MBFC repayments, and the company’s planned use of remaining repurchase authorization.
- Evaluate the sustainability of Nutritional Supplements profitability after full corporate overhead allocation and increased online-channel investment.
- Review the assumptions supporting Beauty trademarks, goodwill and other intangible assets, particularly given the current-year impairment charge.
- Consider the potential effect of Venezuelan exchange-rate changes on the company’s $16.5 million net investment and reported earnings.
- Confirm the reconciliation and limitations of management’s non-GAAP adjusted operating income, adjusted income and adjusted EPS measures.