Helen of Troy Limited — Fiscal 2022 Third-Quarter Form 10-Q
Business Context and Reporting Period
Helen of Troy is a global consumer-products company operating in Housewares, Health & Home, and Beauty. The filing covers the three and nine months ended November 30, 2021, the third quarter of fiscal 2022. The third quarter is historically the company’s highest-sales and highest-operating-income period.
Financial Performance and Position
| Metric | Three Months Ended November 30 | Nine Months Ended November 30 |
|---|---|---|
| Net sales | $624.9 million, down 2.0% | $1.641 billion, up 3.3% |
| Gross profit / margin | $273.8 million / 43.8% | $705.0 million / 43.0% |
| Operating income / margin | $90.0 million / 14.4% | $222.2 million / 13.5% |
| Net income | $75.7 million, down 10.1% | $184.0 million, down 20.6% |
| Diluted EPS | $3.10, versus $3.34 | $7.52, versus $9.14 |
| Adjusted operating income | $106.1 million; 17.0% margin | $282.5 million; 17.2% margin |
| Adjusted diluted EPS | $3.72, versus $3.76 | $9.85, versus $10.05 |
- Segment sales for the quarter were Housewares $246.1 million, Health & Home $203.9 million, and Beauty $174.8 million. Housewares grew 10.7% and Beauty grew 5.9%; Health & Home declined 18.5%.
- Nine-month segment operating income was $112.3 million for Housewares, $29.6 million for Health & Home, and $80.2 million for Beauty.
- Nine-month operating cash flow was negative $5.1 million, compared with $249.7 million of cash provided in the prior-year period. Working-capital investment included increases in receivables and inventory.
- Capital and intangible-asset expenditures were $41.5 million, primarily including land and initial construction for a new 2-million-square-foot Housewares distribution center.
- Cash and cash equivalents were $44.3 million at November 30, 2021. Total long-term debt, including current maturities and net of financing fees, was $447.5 million, compared with $343.6 million at February 28, 2021.
- The company had a $1.25 billion unsecured revolving facility, $434.0 million of outstanding revolver principal, $32.7 million of letters of credit, and $783.3 million available at November 30, 2021. The company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Profitability declined despite nine-month sales growth. Nine-month gross margin fell 0.9 percentage points, operating margin fell 2.7 points, and adjusted operating margin fell 1.1 points.
- Health & Home results were materially affected by EPA-related packaging compliance actions, prior-year COVID-19-driven demand for thermometry and air-filtration products, and unfavorable operating leverage.
- EPA compliance costs totaled $21.0 million for the nine months, including a $13.1 million first-quarter write-off of obsolete packaging, $7.2 million of second- and third-quarter SG&A costs, and additional costs recorded in cost of goods sold.
- Higher inbound freight, container shortages, distribution costs, personnel expenses, and share-based compensation pressured margins. Customer price increases and favorable product mix partially offset these effects.
- Housewares and Beauty benefited from strong consumer demand, retailer orders accelerated ahead of the holiday season, new products, international growth, and expanded distribution. The sale of the North American Personal Care business reduced Beauty sales comparisons.
- The company sold its North America Personal Care business on June 7, 2021, for $44.7 million in cash and recognized a $0.5 million gain. Latin America and Caribbean Personal Care assets remained classified as held for sale.
Outlook, Commentary, Risks, and Unusual Items
- Management stated that operating cash flows and available financing sources were expected to provide sufficient capital for foreseeable liquidity needs, but the filing provided no specific sales or EPS guidance.
- EPA-related shipments had returned to more normalized levels by November 2021, but repackaging of affected inventory was continuing. Additional freight, storage, vendor, legal, and other compliance costs could materially reduce sales, gross profit, and operating income. Potential EPA fines or penalties had not been imposed, but could not be ruled out.
- Global supply-chain disruptions continued to cause higher freight rates, longer lead times, container constraints, raw-material and component shortages, and labor-cost pressure. The company relies heavily on third-party manufacturers, particularly in China.
- COVID-19 remained a risk to consumer demand, retail traffic, sourcing, distribution, and liquidity. Other material risks included tariffs on Chinese imports, foreign-currency movements, customer concentration, regulatory compliance, product recalls, cyber incidents, weather and cough/cold/flu season variability, and acquisition integration.
- Project Refuel was expected to be completed in fiscal 2022. The company had incurred $9.6 million of approximately $10.3 million of estimated total restructuring charges and was targeting annualized profit improvements of approximately $10.5 million to $12.5 million.
- On December 29, 2021, after quarter-end, the company acquired Osprey Packs for $414.7 million in cash, funded with cash on hand and $435.0 million borrowed under the revolving facility. Remaining revolver availability was $351.8 million after the transaction.
Investor Verification Priorities
- Verify the pace and total cost of EPA remediation, including repackaging, inventory charges, customer returns, potential retailer distribution losses, and any fines or penalties.
- Assess whether freight, labor, tariff, and supply-chain inflation can be recovered through pricing without further margin erosion.
- Reconcile the sharp decline in operating cash flow with receivable and inventory growth and monitor working-capital normalization.
- Evaluate post-acquisition leverage, liquidity, covenant headroom, and integration performance following the Osprey acquisition.
- Separate recurring operating performance from non-GAAP adjustments, including EPA compliance costs, acquisition expenses, amortization, share-based compensation, and restructuring charges.
- Monitor Health & Home recovery and the sustainability of Housewares and Beauty growth after retailer orders were accelerated ahead of holiday-season supply constraints.