Helen of Troy Limited — Form 10-Q Summary
Business context and reporting period
Helen of Troy is a global designer, marketer and distributor of branded consumer products across Housewares, Health & Home, Nutritional Supplements and Beauty. The filing covers the quarter and six months ended August 31, 2017, the second quarter and first half of fiscal 2018. The business is seasonal, with historically highest sales and operating income in the fiscal third quarter.
Key financial metrics
| Metric | Three months ended Aug. 31, 2017 | Three months ended Aug. 31, 2016 | Six months ended Aug. 31, 2017 | Six months ended Aug. 31, 2016 |
|---|---|---|---|---|
| Net sales | $378.5 million | $368.2 million | $738.1 million | $716.1 million |
| Gross profit / margin | $167.9 million / 44.4% | $163.0 million / 44.3% | $324.4 million / 44.0% | $315.4 million / 44.0% |
| Operating income / margin | $20.1 million / 5.3% | $37.5 million / 10.2% | $16.9 million / 2.3% | $60.4 million / 8.4% |
| Net income | $8.9 million | $28.4 million | $14.8 million | $47.4 million |
| Diluted EPS | $0.33 | $1.00 | $0.54 | $1.68 |
| Adjusted operating income | $51.5 million / 13.6% | $47.9 million / 13.0% | $94.2 million / 12.8% | $92.4 million / 12.9% |
| Adjusted diluted EPS | $1.65 | $1.31 | $3.03 | $2.59 |
Six-month operating cash flow was $50.0 million versus $85.7 million in the prior-year period. Investing activities used $16.8 million, principally for capital and intangible asset expenditures. Financing activities used $42.6 million, including net repayment of revolving debt and $6.8 million of taxes related to cashless share settlements. Cash decreased to $13.7 million from $23.1 million at February 28, 2017.
At August 31, 2017, inventory was $325.6 million and receivables were $238.4 million. Working capital was $279.9 million and the current ratio was 1.9:1. Total debt was $444.3 million, including $400.1 million outstanding under the revolving credit agreement and $24.2 million under the MBFC loan. The company had $588.0 million of revolver availability, subject to approximately $315.2 million of incremental debt capacity under covenants, and was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Quarterly sales increased 2.8%; six-month sales increased 3.1%. Growth was led by Housewares, Health & Home and online channels.
- Housewares sales increased 8.3% for the quarter and 11.8% year to date, supported by OXO and Hydro Flask products, distribution gains and online sales.
- Health & Home sales increased 2.4% for the quarter and 2.5% year to date.
- Nutritional Supplements sales declined 5.6% for the quarter and 8.9% year to date, primarily due to lower auto-delivery revenue during order-management and customer-relationship-system transitions.
- Beauty sales were essentially flat for the quarter and declined 1.1% year to date, as appliance growth was offset by weakness in personal care.
- Reported operating income declined substantially because of $18.1 million of second-quarter impairment charges and a $3.6 million charge related to the Toys “R” Us bankruptcy. Year-to-date impairment charges totaled $54.1 million, compared with $7.4 million in the prior-year period.
- Excluding specified unusual and non-cash items, quarterly adjusted operating income increased 7.7% and adjusted diluted EPS increased 26.0%; year-to-date adjusted operating income increased 1.9% and adjusted diluted EPS increased 17.0%.
- Year-to-date operating cash flow declined by $35.7 million, primarily reflecting higher inventory and receivables and lower net income before non-cash adjustments.
Guidance, outlook, risks and unusual items
- Management is evaluating strategic alternatives for Nutritional Supplements, including a potential divestiture, additional e-commerce investment, restructuring, realignment or operational consolidation. Further material charges or losses are possible, but the amount cannot be projected.
- Project Refuel, announced October 5, 2017, targets $10 million of annualized profit improvement across Beauty and Nutritional Supplements over 18 months. Expected restructuring charges are $4.0 million to $6.0 million over that period.
- The company recorded $50.1 million of Nutritional Supplements impairments year to date, including $26.0 million of goodwill and $24.1 million of brand assets, plus a $4.0 million Beauty impairment. These charges reflect revised projections and valuation assumptions.
- The filing does not provide a clear quantitative revenue or earnings guidance range for fiscal 2018.
- The company expects to recognize the remaining $13.5 million of the estimated $19.9 million tax benefit associated with impairment charges in the third and fourth quarters, subject to available pretax income.
- Toys “R” Us filed for bankruptcy after quarter-end; the company had already recorded a $3.6 million charge for receivable reserves and estimated liabilities.
- Principal risks include discretionary consumer demand, dependence on major retailers, online-channel execution, foreign exchange, imported supply, product liability and recalls, cold-and-flu season variability, Nutritional Supplements regulatory and reputational risks, future impairment, interest-rate exposure and covenant or liquidity constraints.
- The company is exposed to floating-rate debt: approximately $428.7 million of debt was floating rate at August 31, 2017. It also uses foreign-currency hedges and reported $3.6 million of expected pretax hedge losses to be reclassified into income over the next twelve months.
- The company authorized up to $400 million of common-stock repurchases; $394.1 million remained available at August 31, 2017. Repurchases remain subject to liquidity, market and debt-agreement limitations.
Most important facts for an investor to verify
- Whether Nutritional Supplements revenue and adjusted profitability stabilize after the systems transition and strategic review.
- Whether Project Refuel achieves the targeted $10 million of annualized savings and whether additional restructuring or impairment charges occur.
- The sustainability of adjusted margins and the extent to which reported results remain affected by impairments and other excluded items.
- Inventory, receivables and operating cash-flow trends, particularly ahead of the seasonal third quarter.
- Debt repayment requirements, floating-rate exposure, covenant headroom and the impact of planned share repurchases on liquidity.
- Customer-credit exposure following the Toys “R” Us bankruptcy and any further retailer distress.
- The filing’s non-GAAP reconciliations, because adjusted operating income and adjusted EPS exclude significant charges and are not GAAP measures.