Helen of Troy Limited — Form 10-Q Summary
Reporting period: Three months ended May 31, 2023, the first quarter of fiscal 2024. Helen of Troy is a Bermuda-based consumer products company with two reportable segments: Home & Outdoor and Beauty & Wellness. The company sells brands including OXO, Hydro Flask, Osprey, Vicks, Braun, Honeywell, PUR, Hot Tools and Drybar.
Financial Performance and Position
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $474.7 million | $508.1 million | Down 6.6% |
| Gross profit | $215.6 million | $211.2 million | Up 2.1% |
| Gross margin | 45.4% | 41.6% | Up 3.8 percentage points |
| Operating income | $40.6 million | $33.9 million | Up 19.7% |
| Operating margin | 8.6% | 6.7% | Up 1.9 percentage points |
| Net income | $22.6 million | $24.6 million | Down 8.2% |
| Diluted EPS | $0.94 | $1.02 | Down 7.8% |
| Adjusted operating income | $66.2 million | $69.3 million | Down 4.6% |
| Adjusted diluted EPS | $1.94 | $2.41 | Down 19.5% |
- Segment sales: Home & Outdoor sales declined 7.3% to $217.1 million; Beauty & Wellness sales declined 5.9% to $257.5 million.
- Sales drivers: Organic sales declined 7.7%, partly offset by $6.1 million of incremental Curlsmith sales and a $0.5 million foreign-currency headwind. Leadership Brand sales declined 7.6% to $402.3 million.
- Operating expenses: SG&A declined 5.4% to $167.6 million, but increased to 35.3% of sales from 34.9%. SG&A included a $4.2 million charge related to the Bed Bath & Beyond bankruptcy.
- Interest and taxes: Interest expense increased to $14.1 million from $4.4 million, primarily because of higher interest rates. The effective tax rate declined to 15.5% from 17.0%.
- Cash flow: Operating activities generated $121.1 million, compared with $38.4 million used in the prior-year quarter. Investing activities used $11.6 million, including $11.9 million of capital and intangible asset expenditures. Financing activities used $99.6 million, primarily reflecting net debt repayments.
- Liquidity: Cash and cash equivalents were $38.9 million at May 31, 2023. Total Credit Agreement borrowings were $839.3 million before financing fees, consisting of $594.0 million of revolving loans and $245.3 million of term loans. The weighted average borrowing rate was 6.8%.
- Debt capacity: The company had $637.8 million available under its revolving facility, with $18.2 million of outstanding letters of credit. Debt maturity is March 13, 2025. The company was in compliance with all debt covenants.
- Balance sheet: Receivables were $349.7 million and inventory was $433.9 million at May 31, 2023. Total assets were $2.87 billion and total liabilities were $1.36 billion.
Material Changes Versus the Prior Comparable Period
- Sales declined across both segments because of softer consumer demand, retailer inventory rebalancing, SKU rationalization, lower club-channel sales, and reduced Bed Bath & Beyond orders.
- Gross margin improved primarily because the prior-year period included $11.6 million of EPA compliance costs, along with improved product and customer mix and lower inbound freight costs. Higher inventory obsolescence partly offset the improvement.
- Operating income benefited from the absence of prior-year EPA compliance and Curlsmith acquisition-related costs, as well as lower share-based compensation. These benefits were partly offset by $7.4 million of restructuring charges and the Bed Bath & Beyond bankruptcy charge.
- Net income and GAAP EPS declined despite higher operating income because interest expense increased by $9.7 million year over year.
- Cash flow improved substantially because of lower inventory purchases and receivables, while investing cash usage fell sharply because the prior-year period included the $147.9 million Curlsmith acquisition and significant distribution-facility spending.
- Comparative segment data was recast following the combination of the former Health & Wellness and Beauty operating segments into Beauty & Wellness.
Guidance, Outlook, Risks and Unusual Items
- Project Pegasus: Management targets annualized pre-tax operating profit improvements of approximately $75 million to $85 million, substantially beginning in fiscal 2024 and substantially achieved by the end of fiscal 2026. Expected savings are approximately 25% in fiscal 2024, 50% in fiscal 2025 and 25% in fiscal 2026.
- The company expects approximately 60% of savings from lower cost of goods sold and 40% from lower SG&A. Total one-time pre-tax restructuring charges are estimated at $85 million to $95 million, substantially completed by the end of fiscal 2024. The company incurred $7.4 million in the quarter and had $4.6 million of restructuring liabilities remaining at May 31, 2023.
- Management expects more normalized capital expenditures in fiscal 2024 following completion of its new distribution facility and generally expects borrowings to decline during the remainder of the fiscal year.
- Consumer demand remains exposed to inflation, higher interest rates, reduced disposable income, changing shopping patterns and retailer inventory levels. Approximately 72% of quarterly sales came from U.S. shipments.
- Borrowings are primarily floating-rate, although interest-rate swaps hedged $625 million of principal at May 31, 2023. Further rate increases could increase interest expense and reduce liquidity.
- Patent litigation: Brita alleges infringement involving PUR gravity-fed water filtration systems. The ITC issued an initial determination unfavorable to the company, agreed to partial review on June 28, 2023, and expected a final decision by September 19, 2023. An adverse decision could materially affect financial results, product imports and sales.
- EPA-related packaging and labeling remediation was completed during fiscal 2023, and no EPA compliance costs were recorded in the quarter. The company stated that future fines or penalties remain possible.
- Additional risks include dependence on third-party manufacturers, supply-chain and distribution disruptions, foreign-currency volatility, product regulations, cybersecurity, customer concentration, weather and seasonal demand, and the company’s ability to realize Project Pegasus savings.
Investor Verification Checklist
- Verify whether Project Pegasus achieves the targeted $75 million to $85 million of annualized operating profit improvements and whether restructuring costs remain within the $85 million to $95 million estimate.
- Monitor sales trends, retailer inventory normalization, consumer demand and the sustainability of gross-margin improvement excluding prior-year EPA costs.
- Assess the effect of higher interest rates and the March 13, 2025 debt maturity on future cash flow and refinancing needs.
- Track Bed Bath & Beyond-related receivable losses and any additional customer-credit exposure.
- Follow the Brita patent litigation and ITC review, including potential import restrictions, product replacement costs and customer acceptance.
- Reconcile GAAP results with management’s non-GAAP measures, particularly adjustments for restructuring, bankruptcy-related charges, amortization and share-based compensation.