Helen of Troy Limited — Fiscal 2023 Third-Quarter Form 10-Q
Business context and reporting period
Helen of Troy is a Bermuda-based consumer products company operating in Home & Outdoor, Health & Wellness, and Beauty. The filing covers the three and nine months ended November 30, 2022. The business is seasonal, with historically highest sales and operating income in the third fiscal quarter.
Results include Osprey, acquired in December 2021, and approximately 13 weeks of Curlsmith results, acquired in April 2022. Beginning in the fourth quarter of fiscal 2023, Health & Wellness and Beauty were combined into a Beauty & Wellness reporting segment.
Financial performance and liquidity
| Metric | Three months ended November 30, 2022 | Year-over-year | Nine months ended November 30, 2022 | Year-over-year |
|---|---|---|---|---|
| Net sales | $558.6 million | Down 10.6% | $1,588.1 million | Down 3.2% |
| Gross profit | $256.7 million | Down 6.3% | $689.3 million | Down 2.2% |
| Gross margin | 45.9% | Up 2.1 points | 43.4% | Up 0.4 points |
| Operating income | $77.2 million | Down 14.3% | $158.1 million | Down 28.8% |
| Operating margin | 13.8% | Down 0.6 points | 10.0% | Down 3.5 points |
| Net income | $51.8 million | Down 31.5% | $107.1 million | Down 41.8% |
| Diluted EPS | $2.15 | Down from $3.10 | $4.45 | Down from $7.52 |
Adjusted operating income, a non-GAAP measure, was $92.7 million for the quarter and $234.2 million year to date, with adjusted operating margins of 16.6% and 14.8%, respectively, compared with 17.0% and 17.2% in the prior-year periods. Adjusted diluted EPS was $2.75 for the quarter and $7.44 year to date, compared with $3.72 and $9.85, respectively.
- Quarterly sales declined in all segments: Home & Outdoor fell 7.0%, Health & Wellness 11.5%, and Beauty 14.7%.
- Year-to-date sales increased 7.4% in Home & Outdoor, primarily from Osprey, but declined 3.6% in Health & Wellness and 18.9% in Beauty.
- Organic sales declined 18.5% in the quarter and 12.6% year to date. Acquisitions contributed $56.3 million in quarterly sales and $168.4 million year to date.
- Cash provided by operating activities was $49.5 million year to date, versus cash used of $5.1 million in the prior-year period.
- Investing cash outflow was $290.7 million, including $146.2 million of capital and intangible asset expenditures and $146.3 million of net acquisition payments.
- Financing activities provided $253.1 million, primarily from debt borrowings. Cash and cash equivalents totaled $45.3 million at November 30, 2022.
Balance sheet, debt, and capital allocation
Total assets were $3.13 billion and stockholders’ equity was $1.46 billion at November 30, 2022. Inventory was $536.8 million, receivables were $505.6 million, and current liabilities were $522.7 million.
Total long-term debt, including current maturities and excluding unamortized financing fees, was approximately $1.08 billion, up from $816.2 million at February 28, 2022. The company had $1.068 billion of borrowings under its Credit Agreement, a $14.8 million MBFC Loan, $18.2 million of outstanding letters of credit, and $411.8 million available under the revolving facility. Debt carried weighted-average interest rates of 5.9% under the Credit Agreement and 5.4% under the MBFC Loan at period-end.
The Credit Agreement matures March 13, 2025. Temporary maximum leverage ratios were 4.00-to-1.00 through February 28, 2023, 3.75-to-1.00 through May 31, 2023, and 3.50-to-1.00 thereafter. The company was in compliance with all debt covenants. A 1% increase in market rates was estimated to increase annual interest expense, net of swaps, by approximately $9.6 million.
The company repurchased no shares in the open market during the quarter. It acquired 382,000 shares for approximately $45,000 through equity award net settlements and had $403.6 million remaining under its $500 million repurchase authorization.
Material changes versus the prior comparable period
- Lower consumer demand, retailer inventory rebalancing, changed shopping patterns, and unfavorable comparisons from accelerated prior-year orders drove the organic sales decline.
- Higher interest expense increased to $13.1 million for the quarter and $26.7 million year to date, versus $3.2 million and $9.5 million, respectively, due to higher debt and interest rates.
- Project Pegasus restructuring charges increased to $10.5 million for the quarter and $15.2 million year to date, versus negligible and $0.4 million in the prior-year periods.
- Gross margin improved, but operating margins declined because of unfavorable operating leverage, wage, distribution, marketing, freight, amortization, and share-based compensation costs.
- Year-to-date results include a $9.7 million gain from insurance recoveries related to weather-damaged inventory. The company also received $34.5 million of insurance proceeds during the quarter and expected an additional $11.5 million collected in December 2022.
- EPA compliance costs were $2.1 million in the quarter and $22.1 million year to date. Repackaging and relabeling activities were completed during the quarter, but additional costs or penalties remain possible.
Guidance, outlook, commentary, and risks
The filing does not provide clear consolidated revenue or EPS guidance. Management expects Project Pegasus to produce annualized pre-tax operating profit improvements of approximately $75 million to $85 million, beginning in fiscal 2024 and substantially achieved by fiscal 2026. Expected savings are approximately 25% in fiscal 2024, 50% in fiscal 2025, and 25% in fiscal 2026. One-time pre-tax restructuring charges are estimated at $85 million to $95 million through fiscal 2025. The plan is expected to reduce the global workforce by approximately 10%.
Management expects inventory, working-capital, and cash-flow improvements to continue through the remainder of fiscal 2023 and into fiscal 2024. It believes operating cash flow and available financing will fund foreseeable liquidity needs, but expects elevated borrowings during fiscal 2023.
- Inflation, higher interest rates, weaker discretionary spending, retailer inventory reductions, and potential recessionary conditions may pressure sales and margins.
- Global supply-chain disruptions, freight costs, labor shortages, raw-material availability, geopolitical events, and COVID-19 developments remain material uncertainties.
- Brita LP patent litigation and a related International Trade Commission investigation involving certain PUR water filtration products remain unresolved. Potential losses, injunctive relief, and timing cannot be predicted.
- EPA packaging compliance matters could result in additional compliance costs, adverse operating effects, or fines and penalties.
- Osprey and Curlsmith integration, acquisition synergies, goodwill and intangible-asset valuations, and execution of Project Pegasus are significant execution risks.
- Debt maturities, floating-rate exposure, leverage covenants, and the March 2025 Credit Agreement maturity could constrain financial flexibility.
Investor verification priorities
- Verify the sustainability of organic sales and retailer orders after the holiday-season comparison effects and inventory normalization.
- Track debt reduction, interest expense, leverage-ratio compliance, available revolver capacity, and the March 2025 refinancing requirement.
- Assess whether Project Pegasus delivers the stated $75 million to $85 million annualized operating-profit improvement against its $85 million to $95 million restructuring-cost estimate.
- Separate recurring operating performance from insurance gains, EPA compliance costs, restructuring charges, acquisition effects, amortization, and other non-GAAP adjustments.
- Monitor additional EPA costs or penalties and developments in the Brita patent and ITC proceedings.
- Evaluate the performance and integration of Osprey and Curlsmith, including their effect on segment margins and goodwill.