Helen of Troy Limited — Q1 FY2015 Summary
Business Context and Reporting Period
Form 10-Q for the three months ended May 31, 2014, compared with the three months ended May 31, 2013. Helen of Troy designs, sources, markets and distributes consumer products through three segments: Housewares, Healthcare/Home Environment and Personal Care. The business is seasonal, with historically highest sales and operating income in the fiscal third quarter.
Financial Performance and Key Metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $311.8 million | $304.5 million | Up 2.4% |
| Gross profit | $119.5 million | $120.2 million | Down 0.5% |
| Gross margin | 38.3% | 39.5% | Down 1.2 percentage points |
| SG&A | $87.4 million | $87.5 million | Down 0.1% |
| Operating income | $23.1 million | $20.6 million | Up 12.1% |
| Operating margin | 7.4% | 6.8% | Up 0.6 percentage points |
| Net income | $16.4 million | $14.4 million | Up 13.9% |
| Diluted EPS | $0.55 | $0.45 | Up $0.10 |
| Cash provided by operations | $3.0 million | $46.8 million | Down $43.9 million |
Segment sales were $66.8 million for Housewares, $142.5 million for Healthcare/Home Environment and $102.5 million for Personal Care. Segment operating income was $13.0 million, $8.7 million and $1.4 million, respectively.
Income excluding non-cash impairment charges was $24.6 million, or $0.83 diluted EPS, versus $26.4 million, or $0.82 diluted EPS, in the prior-year quarter. This is a non-GAAP measure and should not replace GAAP results.
Liquidity, Balance Sheet and Debt
- Cash and cash equivalents were $29.2 million at May 31, 2014, down from $70.0 million at February 28, 2014.
- Current assets were $586.3 million and current liabilities were $541.5 million, producing working capital of $44.8 million and a current ratio of 1.1:1.
- Revolving credit borrowings were $235.0 million against a $375 million unsecured commitment; availability was $139.7 million after consideration of outstanding letters of credit.
- Total long-term debt was $190.7 million, including $96.9 million of current maturities. Total debt, including the revolver, was approximately $425.7 million at quarter-end.
- On June 30, 2014, the company repaid $75 million of Senior Notes at maturity. On June 11, 2014, the revolving commitment was subsequently increased to $570 million in connection with the Healthy Directions acquisition.
- The company was in compliance with its debt covenants at May 31, 2014. Debt agreements impose leverage, interest coverage, net worth, borrowing, dividend and share-repurchase restrictions.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, led by Healthcare/Home Environment, which grew 13.4%, and Housewares, which grew 5.1%. Personal Care declined 11.1%.
- Gross margin declined because of higher promotional costs, product costs and a less favorable segment and product mix, including greater sales of lower-margin fans and direct-import products.
- SG&A declined slightly as a percentage of sales, primarily because of lower incentive compensation, partly offset by higher media advertising costs.
- Operating income and GAAP EPS increased partly because the Personal Care impairment charge fell to $9.0 million from $12.0 million in the prior-year quarter.
- Operating cash flow fell sharply because of settlement of former CEO succession obligations and unfavorable working-capital timing, including higher receivables and inventory.
- The company repurchased 4.17 million shares for approximately $278.3 million, substantially reducing weighted-average shares and supporting diluted EPS despite lower adjusted income.
- Internet-only channel sales grew approximately 44% year over year and represented approximately 8% of consolidated sales.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide clear quantitative revenue or earnings guidance.
- Management expects cash from operations and available financing to fund foreseeable needs, including the Healthy Directions acquisition, debt maturities, scheduled principal payments, inventory and receivables.
- On June 30, 2014, Helen of Troy completed the approximately $195.3 million cash acquisition of Healthy Directions, a direct-to-consumer provider of premium doctor-branded vitamins, minerals and supplements. The acquisition was funded with cash and borrowings and is expected to expand internet and direct-to-consumer capabilities.
- The company recorded a $9.0 million non-cash impairment charge, or $8.16 million after tax, against certain Personal Care trademarks following annual impairment testing.
- Key risks include discretionary consumer demand, promotional retail conditions, competition, dependence on foreign manufacturing and China sourcing, product-cost inflation, currency volatility, Venezuela-related exchange controls and potential devaluation, debt leverage, covenant restrictions, supply-chain and distribution disruptions, weather, impairment risk, acquisitions and integration, and information-security and regulatory risks.
- Approximately 15% of quarterly sales were denominated in foreign currencies. Venezuela represented approximately 0.6% of sales, with a $7.84 million net investment; management warned that a future devaluation could create material charges.
- Legal claims arise in the normal course of business, but management stated that they are not expected to materially affect financial position, results or liquidity.
Important Facts for Investors to Verify
- Assess whether the Personal Care revenue decline, competitive pressure and recurring impairment risk persist.
- Verify post-acquisition leverage, covenant compliance, available revolver capacity and the impact of the Healthy Directions acquisition on results.
- Reconcile the significant decline in operating cash flow with working-capital trends and former CEO succession-related payments.
- Evaluate whether lower gross margins from product mix, promotions, sourcing costs and retailer pricing pressure continue.
- Confirm the effect of the substantial share repurchases on future EPS, liquidity and debt levels.
- Review subsequent-period results for repayment of the $75 million notes, termination of the related interest-rate swap and any further debt amendments.