Helen of Troy Limited — Form 10-Q Summary
Reporting period: Quarter and six months ended August 31, 2019; fiscal 2020 second quarter. The company is a global designer, importer, marketer and distributor of consumer products through Housewares, Health & Home, and Beauty. Results exclude the Nutritional Supplements business, which was divested in December 2017 and reported as discontinued operations.
Financial Performance and Position
| Metric | Three Months Ended Aug. 31, 2019 | Year-over-Year | Six Months Ended Aug. 31, 2019 | Year-over-Year |
|---|---|---|---|---|
| Net sales | $414.0 million | +5.2% | $790.3 million | +5.6% |
| Gross profit | $178.2 million | +14.8% | $331.9 million | +10.0% |
| Gross margin | 43.0% | +3.6 pts. | 42.0% | +1.7 pts. |
| Operating income | $54.5 million | +7.6% | $101.7 million | +8.2% |
| Operating margin | 13.2% | +0.3 pts. | 12.9% | +0.3 pts. |
| Income from continuing operations | $46.1 million | +4.7% | $86.8 million | +5.6% |
| Diluted EPS from continuing operations | $1.83 | +10.2% | $3.44 | +11.3% |
| Operating cash flow | Not separately provided | — | $38.2 million | Compared with $37.3 million |
Adjusted operating income, a non-GAAP measure excluding restructuring charges, intangible amortization and non-cash share-based compensation, was $65.8 million for the quarter, with a 15.9% adjusted margin, and $125.1 million year to date, with a 15.8% adjusted margin. Adjusted diluted EPS was $2.24 for the quarter and $4.30 year to date.
At August 31, 2019, cash and cash equivalents were $17.0 million, working capital was $393.5 million and the current ratio was 2.2:1. Total debt was approximately $301.2 million, including $283.0 million outstanding under the revolving credit facility and $20.4 million under the MBFC Loan. The company had $708.0 million of revolving borrowing availability and was in compliance with debt covenants.
Inventory increased to $370.9 million from $302.3 million at February 28, 2019, while receivables increased to $310.4 million from $280.3 million. Capital and intangible asset expenditures were $8.9 million year to date. Financing activities used $24.2 million, and cash increased $5.2 million during the first six months.
Segment Results and Material Changes
- Housewares: Second-quarter sales increased 22.1% to $167.9 million; year-to-date sales increased 22.8% to $312.8 million. Operating margin improved to 21.3% for the quarter and 21.4% year to date, driven by favorable product and channel mix and operating leverage.
- Health & Home: Second-quarter sales declined 9.7% to $158.8 million; year-to-date sales declined 7.5% to $313.7 million. Year-to-date operating margin fell to 8.8% from 9.8%, reflecting lower sales, unfavorable operating leverage, channel mix and foreign exchange effects. Management cited unfavorable comparisons with the prior year’s stronger cough/cold/flu season, less wildfire activity and distribution changes.
- Beauty: Second-quarter sales increased 8.8% to $87.3 million and year-to-date sales increased 6.2% to $163.8 million. Operating margin declined to 7.3% for the quarter and 4.5% year to date, primarily due to higher freight, compensation, amortization, unfavorable mix and foreign exchange effects.
- Online and direct-to-consumer-related sales represented approximately 24% of consolidated sales in the quarter and 23% year to date, growing approximately 25% and 26%, respectively, from the comparable periods.
- Leadership Brand sales increased 3.8% in the quarter and 5.5% year to date.
Outlook, Commentary, Risks and Unusual Items
- Management began Phase II of its multi-year transformation strategy in fiscal 2020, targeting improved organic sales growth, continued margin expansion, investment in Leadership Brands, operating efficiencies and strategic capital deployment. The filing does not provide a specific fiscal-year revenue or EPS guidance figure.
- Project Refuel targets annualized profit improvements of approximately $8.0 million to $10.0 million. The plan is expected to conclude during fiscal 2020; cumulative restructuring charges were $6.4 million through August 31, 2019, with $0.7 million of remaining liability.
- Tariffs on products imported from China continued to pressure costs. The company expects to mitigate the impact through pricing actions and supply-chain cost reductions, but cautions that pricing could reduce retail consumption or customer orders.
- The company adopted the new lease standard on March 1, 2019, recognizing approximately $37.1 million of operating lease assets and $47.2 million of lease liabilities. The adoption did not materially affect income or cash flow.
- The company received a $10.8 million supplemental payment related to the 2017 divestiture of Healthy Directions. The payment contributed to operating cash flow in the period.
- Foreign exchange reduced reported sales by approximately $1.9 million in the quarter and $4.5 million year to date. Interest expense increased to $3.2 million in the quarter and $6.5 million year to date because of higher average debt and interest rates.
- The Macau tax holiday is expected to end after calendar 2020, after which the Macau subsidiary may become subject to an approximately 12% statutory corporate tax rate. The ultimate effect is not yet determinable.
- Key risks include consumer spending and retail concentration, seasonality and weather-sensitive demand, dependence on foreign suppliers, China tariffs, foreign exchange, freight and distribution constraints, product liability and litigation, tax disputes, cybersecurity and potential goodwill or intangible-asset impairment.
- The company authorized up to $400 million of share repurchases through May 2022. Approximately $394.0 million remained available at August 31, 2019; only $9.1 million of shares were repurchased year to date, primarily through employee equity-award net exercises.
Important Facts for Investors to Verify
- Whether Housewares growth can offset continued weakness in Health & Home and margin pressure in Beauty.
- The sustainability of gross-margin improvement, particularly after tariff exclusion refunds and changes in product and channel mix.
- The effect of tariffs, pricing actions, freight costs and supplier-consolidation efforts on future margins and inventory levels.
- The company’s ability to convert earnings into cash given the substantial year-to-date inventory increase and relatively modest operating cash flow.
- Future borrowing needs, floating-rate exposure, covenant headroom and the December 2021 maturity of the revolving credit commitment.
- The eventual tax impact of the Macau regime change and the potential effects of U.K. Brexit-related developments and ORIP tax rules.
- The use and comparability of management’s non-GAAP adjusted results, which exclude recurring or potentially recurring compensation and amortization costs in addition to restructuring charges.