Business Context and Reporting Period
Helen of Troy Limited is a Bermuda-based global designer, marketer and distributor of consumer products across Housewares, Health & Home, and Beauty. This unaudited Form 10-Q covers the quarter and nine months ended November 30, 2020, representing the third quarter of fiscal 2021. The third quarter is historically the company’s highest-sales and highest-operating-income period.
The results include Drybar Products for the full quarter and nine-month period following its January 23, 2020 acquisition for approximately $255.9 million. Certain Personal Care assets, including brands such as Pert, Brut, Sure and Infusium, were classified as held for sale.
Key Financial Metrics
| Metric | Three Months Ended November 30, 2020 | Year-over-Year Change | Nine Months Ended November 30, 2020 | Year-over-Year Change |
|---|---|---|---|---|
| Net sales | $637.7 million | +34.3% | $1,589.4 million | +25.6% |
| Gross profit | $287.3 million | +36.8% | $697.0 million | +28.6% |
| Gross margin | 45.1% | +0.9 percentage points | 43.9% | +1.1 percentage points |
| Operating income | $100.7 million | +27.0% | $257.0 million | +42.0% |
| Operating margin | 15.8% | Down 0.9 percentage points | 16.2% | Up 1.9 percentage points |
| Net income | $84.2 million | +22.5% | $231.8 million | +49.1% |
| Diluted EPS | $3.34 | +23.2% | $9.14 | +48.6% |
| Adjusted diluted EPS | $3.76 | +20.5% | $10.05 | +35.4% |
Adjusted operating income was $111.9 million, or 17.6% of sales, in the quarter, compared with $90.3 million, or 19.0%, in the prior-year quarter. For the nine-month period, adjusted operating income was $291.5 million, or 18.3% of sales, compared with $215.4 million, or 17.0%.
- Segment sales: Third-quarter Housewares sales rose 21.4% to $222.4 million; Health & Home rose 34.6% to $250.2 million; and Beauty rose 56.2% to $165.2 million. Nine-month growth was 13.9%, 32.4% and 34.7%, respectively.
- Cash flow: Operating activities generated $249.7 million in the first nine months, compared with $101.4 million in the prior-year period. Capital and intangible asset expenditures were $19.4 million.
- Liquidity: Cash and cash equivalents were $156.7 million at November 30, 2020, versus $24.5 million at February 29, 2020. Working capital was $491.6 million and the current ratio was 1.8 to 1.
- Debt: Total long-term debt, including current maturities and net of financing fees, was $440.4 million, compared with $339.3 million at fiscal year-end. Revolving debt principal was $426.0 million, with $804.8 million of borrowing availability and $19.2 million of outstanding letters of credit.
- Share repurchases: The company repurchased approximately 960,829 shares for $191.6 million in the first nine months, in addition to shares acquired through equity-plan net settlements. Approximately $190.0 million remained available under the repurchase authorization at November 30, 2020.
Material Changes Versus the Prior Comparable Period
- Organic sales increased 30.3% in the quarter and 23.1% for the nine-month period. Drybar contributed $17.5 million of quarterly sales and $35.6 million of nine-month sales.
- Health & Home benefited from strong demand for thermometers, air purification and other healthcare and healthy-living products. Housewares benefited from increased OXO demand as consumers spent more time at home.
- Beauty benefited from One-Step products, expanded distribution, holiday promotions and Drybar. Beauty operating income increased 111.7% on an adjusted basis in the quarter and 109.7% for the nine-month period.
- Quarterly operating margin declined despite higher sales because of increased marketing, freight and distribution, royalty, legal and professional-fee, and bad-debt expenses, as well as unfavorable Housewares mix.
- Nine-month operating margin expanded primarily because of operating leverage, favorable product mix and temporary COVID-19 cost reductions, including lower personnel, marketing and travel expenses.
- Accounts receivable increased to $500.1 million and inventory to $383.4 million at November 30, 2020, from $348.0 million and $256.3 million, respectively, at February 29, 2020, reflecting higher sales and inventory investment.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide a clear numerical full-year sales or earnings guidance range.
- Management expects to continue increasing investments in marketing, product development, product launches, capital expenditures, hiring and promotions during the fourth quarter as part of its Phase II transformation strategy.
- COVID-19 produced net favorable effects during the nine-month period, but store closures, reduced traffic, weaker discretionary demand, supply-chain constraints, freight-network delays and product out-of-stocks remain material risks. Demand exceeded supply capacity in certain thermometry and Housewares categories.
- The company expects to complete the Personal Care divestiture during fiscal 2021. The disposal group had $39.3 million of assets held for sale at November 30, 2020.
- The March 2020 credit agreement amendment increased the revolving commitment to $1.25 billion, extended maturity to March 13, 2025 and increased the accordion feature to $300 million. The company was in compliance with all debt covenants.
- The CARES Act generated a $9.4 million tax benefit in the first quarter. The nine-month effective tax rate was 6.5%, compared with 9.6% in the prior-year period. Macau’s transition from an offshore tax regime is expected to increase the annual effective tax rate by approximately 1.5 to 2.0 percentage points beginning in fiscal 2022.
- A disputed $6.0 million state tax assessment was agreed in principle to be settled for $0.5 million; the agreement was signed December 4, 2020.
- On December 22, 2020, the company paid $72.5 million for an exclusive, global, 40-year Revlon trademark license. The upfront fee will be capitalized and amortized, while ongoing Revlon royalty expense will cease after the effective date.
- Project Refuel generated $0.4 million of restructuring charges in the first nine months. Cumulative charges were $9.1 million, with approximately $0.2 million remaining accrued at November 30, 2020.
- Principal risks include COVID-19 volatility, reliance on large retail customers, foreign manufacturing and China tariffs, supply and freight capacity, foreign exchange, interest rates, acquisitions and divestitures, goodwill and intangible-asset impairment, tax disputes, cybersecurity and product liability.
Investor Verification Items
- Verify whether elevated COVID-related demand, particularly in Health & Home and Housewares, is sustainable and whether supply constraints and freight delays are limiting sales.
- Assess the effect of Drybar integration, the Revlon license, and the planned Personal Care divestiture on future Beauty revenue and margins.
- Monitor working-capital conversion, inventory levels, receivables and operating cash flow as sales growth normalizes.
- Reconcile GAAP results with adjusted measures, particularly the effects of amortization, share-based compensation, restructuring and the $9.4 million tax benefit.
- Evaluate leverage, floating-rate exposure, covenant headroom and the use of cash or additional debt for repurchases and acquisitions.
- Confirm the timing and proceeds of the Personal Care divestiture and any related impairment or tax consequences.