HELEN OF TROY LTD quarterly report, Q3 FY2016

Helen of Troy Limited — Form 10-Q Summary

Reporting period: Fiscal third quarter and first nine months ended November 30, 2015. The company designs, sources, markets and distributes consumer products through Housewares, Health & Home, Nutritional Supplements and Beauty segments. The business is seasonal, with the third fiscal quarter historically producing the highest sales and operating income.

Financial performance

MetricThree months ended Nov. 30, 2015Three months ended Nov. 30, 2014Nine months ended Nov. 30, 2015Nine months ended Nov. 30, 2014
Net sales$445.5 million$435.7 million$1,160.0 million$1,067.4 million
Gross profit margin41.0%41.6%40.8%40.7%
Operating income$55.6 million$65.0 million$114.6 million$112.8 million
Operating margin12.5%14.9%9.9%10.6%
Net income$46.8 million$55.4 million$91.6 million$90.6 million
Diluted EPS$1.63$1.92$3.17$3.12
Operating cash flowNot separately providedNot separately provided$72.8 million$63.5 million

Third-quarter sales increased 2.3%, while nine-month sales increased 8.7%. Core-business sales increased 1.6% in the quarter and 3.3% year to date; acquisitions contributed much of the remaining growth. SG&A increased 9.0% in the quarter and 13.8% year to date, raising the SG&A ratio to 28.5% and 30.7%, respectively.

Reported adjusted diluted EPS was $2.07 for the quarter versus $2.17 in the prior year and $4.23 for the nine months versus $4.19. These are non-GAAP measures excluding specified items and should not replace GAAP results.

Segment trends

  • Housewares: Sales increased 2.1% in the quarter and 4.3% year to date. Operating income declined 15.0% in the quarter and 7.4% year to date due to promotional and advertising spending, product mix and CEO succession costs.
  • Health & Home: Sales increased 5.3% in the quarter and 6.1% year to date, supported by healthcare products and the VapoSteam acquisition. Warmer weather reduced heater demand, while lower cough, cold and flu incidence could affect future replenishment orders.
  • Nutritional Supplements: Quarterly sales declined 2.5% and operating income declined 51.2%. Results reflected promotional pricing, lower average order values, reduced print-newsletter activity, increased customer-acquisition spending and newly allocated corporate overhead.
  • Beauty: Quarterly sales declined 0.3% but increased 1.3% year to date. Competitive pressure, lost retail distribution and foreign exchange reduced performance. Management did not expect meaningful full-year fiscal 2016 sales growth in this segment.

Liquidity, debt and cash flow

  • Cash and cash equivalents were $21.1 million at November 30, 2015, compared with $12.3 million at February 28, 2015.
  • Operating activities generated $72.8 million during the first nine months. Investing activities used $55.2 million, including $42.8 million for the VapoSteam acquisition and $12.4 million for capital and intangible expenditures.
  • Financing activities used $8.8 million, including $50.0 million for share repurchases. The company repurchased 556,591 shares at an average price of $89.83.
  • Total debt was $474.7 million, including $380.9 million outstanding under a $650 million revolving credit facility. Availability was $267.6 million, although debt agreements effectively limited additional borrowing to $254.95 million.
  • The company reported a 2.3:1 current ratio, working capital of $386.4 million and an ending debt-to-equity ratio of 49.0%. It was in compliance with debt covenants at November 30, 2015.

Material changes, unusual items and outlook

  • On November 12, 2015, the company settled litigation with its former CEO. It issued 276,548 shares, of which 116,012 were tendered back for tax obligations, and recorded $6.71 million of CEO succession costs, or $4.64 million after tax and $0.16 per diluted share.
  • The company recorded a $3.0 million non-cash Beauty trademark impairment charge during the first quarter, compared with $9.0 million in the prior-year period.
  • The prior-year comparison benefited from a $7.0 million pre-tax gain from amending a trademark license agreement, making year-over-year operating comparisons less favorable.
  • The Vicks VapoSteam and VapoPad businesses were acquired on March 31, 2015 for approximately $42.75 million and added to Health & Home.
  • Foreign exchange reduced reported sales by approximately $8.8 million in the quarter and $25.1 million year to date. Approximately 16% of quarterly sales and 15% of year-to-date sales were denominated in foreign currencies.
  • Management expected Housewares growth to remain in the mid-single digits, anticipated continued internet-channel growth, and expected moderate domestic holiday retail growth. Management stated that cautious consumer sentiment, traditional retail pressure and currency volatility remained concerns.
  • Key risks include dependence on discretionary consumer demand and major retailers, foreign manufacturing and supply-chain disruptions, foreign exchange exposure, interest-rate risk on floating-rate debt, potential impairment of goodwill and intangible assets, Venezuelan currency uncertainty, acquisition integration, product liability and regulatory risks in Nutritional Supplements.
  • On January 7, 2016, the company extended CEO Julien Mininberg’s employment through February 28, 2019. The agreement includes a $950,000 base salary, incentive compensation opportunities and specified termination and change-of-control benefits.

Investor verification points

  • Verify whether sales growth remains positive after separating acquisition contributions, foreign exchange effects and Venezuela-related results.
  • Assess whether higher SG&A, promotional spending and customer-acquisition investments translate into sustainable revenue and margin improvement.
  • Monitor Health & Home seasonality, cough/cold/flu demand, weather-sensitive products and the integration economics of VapoSteam.
  • Review debt covenant headroom, floating-rate exposure, scheduled Senior Notes and MBFC repayments, and the company’s planned use of remaining repurchase authorization.
  • Evaluate the sustainability of Nutritional Supplements profitability after full corporate overhead allocation and increased online-channel investment.
  • Review the assumptions supporting Beauty trademarks, goodwill and other intangible assets, particularly given the current-year impairment charge.
  • Consider the potential effect of Venezuelan exchange-rate changes on the company’s $16.5 million net investment and reported earnings.
  • Confirm the reconciliation and limitations of management’s non-GAAP adjusted operating income, adjusted income and adjusted EPS measures.