Business Context and Reporting Period
Helen of Troy Limited is a global consumer products company operating through two reportable segments: Home & Outdoor and Beauty & Wellness. The Form 10-Q covers the quarter and six months ended August 31, 2023, the second quarter of fiscal 2024. Prior-period segment information was recast after combining the former Health & Wellness and Beauty operating segments into Beauty & Wellness.
Key Financial Metrics
| Metric | Three Months Ended August 31, 2023 | Six Months Ended August 31, 2023 |
|---|---|---|
| Net sales | $491.6 million, down 5.7% | $966.2 million, down 6.1% |
| Gross profit / margin | $229.7 million / 46.7% | $445.3 million / 46.1% |
| Operating income / margin | $46.8 million / 9.5% | $87.5 million / 9.1% |
| Net income | $27.4 million | $50.0 million |
| Diluted EPS | $1.14 | $2.07 |
| Adjusted operating income | $62.3 million / 12.7% margin | $128.4 million / 13.3% margin |
| Adjusted diluted EPS | $1.74 | $3.67 |
| Operating cash flow | Not separately provided | $157.7 million |
At August 31, 2023, cash and cash equivalents were $24.2 million, inventory was $435.7 million, and total debt was $844.9 million, net of unamortized financing fees. Approximate net debt was $820.7 million. The company had $629.2 million of borrowing capacity and $17.8 million of outstanding letters of credit under its Credit Agreement. Debt carried a weighted average interest rate of 7.1%; $625.0 million of borrowings was hedged with interest-rate swaps. The Credit Agreement matures March 13, 2025, and the company was in compliance with all covenants.
Capital and intangible asset expenditures were $20.6 million for the first six months, compared with $112.6 million in the prior-year period. Financing activities used $142.3 million, including $87.0 million of net revolving-loan repayments, $54.5 million of share repurchases and $3.1 million of debt repayments.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined $29.8 million, primarily from a 10.4% decline in Beauty & Wellness; Home & Outdoor sales were approximately flat, down 0.2%.
- Six-month sales declined $63.2 million. Organic sales decreased $70.2 million, partly offset by $6.1 million of incremental Curlsmith sales and favorable foreign-currency effects.
- Gross margin expanded 420 basis points in the quarter and 410 basis points year to date, primarily because of lower freight, SKU rationalization, lower inventory obsolescence and the absence of prior-year EPA compliance costs.
- GAAP operating margin increased despite lower sales, but adjusted operating margin declined to 12.7% in the quarter from 13.9% and to 13.3% year to date from 13.8%.
- Net income declined 10.7% in the quarter and 9.6% year to date. Higher interest expense was the principal earnings headwind; interest expense increased 49.0% in the quarter and more than doubled year to date.
- Beauty & Wellness GAAP operating income improved to $10.7 million in the quarter and $29.3 million year to date, helped by the absence of $8.4 million and $20.0 million of prior-year EPA compliance costs, respectively. Adjusted operating income nevertheless declined in both periods.
- Operating cash flow improved substantially from $75.5 million of cash used in the prior-year six-month period to $157.7 million provided, primarily due to improved inventory, receivables and accounts-payable working capital.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Project Pegasus restructuring charges are now expected to total approximately $60 million to $65 million through fiscal 2025, reduced from the previous estimate of $85 million to $95 million. Charges incurred were $3.6 million in the quarter and $11.0 million year to date; $2.3 million remained accrued at August 31, 2023.
- Management targets annualized pre-tax operating-profit improvements of approximately $75 million to $85 million, with savings expected to be recognized approximately 25% in fiscal 2024, 50% in fiscal 2025 and 25% in fiscal 2026. Approximately 60% is expected from lower cost of goods sold and 40% from lower SG&A.
- The company plans to consolidate its U.S. Beauty operations in El Paso and Irvine with Wellness operations near Boston, with completion expected during fiscal 2025.
- Management expects lower capital expenditures and continued repayment of Credit Agreement borrowings during the remainder of fiscal 2024. It believes operating cash flow and available financing will meet foreseeable liquidity needs.
- Inflation, higher interest rates, weaker discretionary consumer demand, retailer inventory rebalancing, geopolitical conditions and potential supply-chain disruption remain material risks. The company sources products largely from third-party manufacturers in China, Mexico, Vietnam and the United States.
- The company recorded a $4.2 million charge related to the Bed, Bath & Beyond bankruptcy during the first six months. No EPA compliance costs were incurred in the current-year periods, although potential future fines or penalties cannot be ruled out.
- On September 28, 2023, after quarter-end, the company sold its El Paso distribution and office facilities for $50.6 million before transaction costs and entered into an approximately 18-month leaseback of the office facilities. It expects to recognize an approximately $34.2 million gain in third-quarter fiscal 2024 and plans to use the proceeds to repay debt.
- The ITC issued a September 19, 2023 final determination finding no violation by the company in Brita patent litigation and terminated the ITC investigation. Related district-court patent litigation remains stayed and could still have a material adverse outcome.
- Disclosure controls and procedures were assessed as effective as of August 31, 2023, with no material changes in internal control over financial reporting.
Facts Investors Should Verify
- Whether Project Pegasus achieves the targeted $75 million to $85 million of annualized operating-profit improvements and whether total restructuring costs remain within the revised $60 million to $65 million range.
- The sustainability of gross-margin gains after the favorable comparison with prior-year EPA compliance costs and freight-cost benefits.
- Beauty & Wellness organic demand, particularly for fans, heaters, air filtration, humidification and hair appliances, as well as the effect of retailer inventory levels.
- Interest-rate exposure, debt repayment progress and refinancing plans before the March 2025 Credit Agreement maturity.
- Use of proceeds from the El Paso sale and the actual gain recognized in the third quarter of fiscal 2024.
- The outcome of the remaining Brita district-court patent litigation and any potential EPA fines or penalties.
- Whether continued share repurchases are consistent with liquidity needs and debt-covenant limitations.