Business Context and Reporting Period
Helen of Troy Limited is a Bermuda-domiciled consumer products company operating in Housewares, Health & Home, and Beauty. This unaudited Form 10-Q covers the three months ended May 31, 2021, the first quarter of fiscal 2022, compared with the three months ended May 31, 2020. The business is seasonal, with historically highest sales and operating income in the fiscal third quarter.
The company sells brands including OXO, Hydro Flask, Honeywell, PUR, Vicks, Braun, Hot Tools and Drybar. It purchases products primarily from unaffiliated manufacturers in China, Mexico and the United States.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $541.2 million | $420.8 million | +28.6% |
| Gross profit | $220.6 million | $179.3 million | +23.0% |
| Gross margin | 40.8% | 42.6% | -1.8 percentage points |
| Operating income | $64.8 million | $57.0 million | +13.8% |
| Operating margin | 12.0% | 13.5% | -1.5 percentage points |
| Net income | $57.0 million | $60.3 million | -5.5% |
| Diluted EPS | $2.31 | $2.37 | -2.5% |
| Adjusted operating income | $95.0 million | $71.1 million | +33.6% |
| Adjusted operating margin | 17.5% | 16.9% | +0.6 percentage points |
| Adjusted diluted EPS | $3.48 | $2.53 | +37.5% |
Adjusted measures are non-GAAP and exclude specified items including EPA compliance costs, restructuring charges, amortization of intangible assets and non-cash share-based compensation. They are not substitutes for GAAP results.
Segment Performance
| Segment | Sales | Year-over-year change | Operating income | Operating margin |
|---|---|---|---|---|
| Housewares | $193.6 million | +37.7% | $27.1 million | 14.0% |
| Health & Home | $204.1 million | +2.1% | $11.2 million | 5.5% |
| Beauty | $143.5 million | +78.8% | $26.4 million | 18.4% |
Sales growth was driven primarily by Housewares and Beauty, including improved brick-and-mortar comparisons following COVID-19-related store closures and reduced traffic in the prior year, stronger international, club and closeout sales, online growth, and shipments delayed by Winter Storm Uri. Leadership Brand sales increased 22.9% to $429.1 million.
Cash Flow, Balance Sheet and Liquidity
- Operating activities used $63.4 million of cash, compared with $92.8 million provided in the prior-year period. The change primarily reflected increased working-capital usage, incentive compensation payments and tax withholding settlements.
- Investing activities used $4.0 million, primarily for capital and intangible asset expenditures, compared with $6.5 million previously.
- Financing activities provided $59.6 million, including net borrowings under the revolving credit facility and $110.1 million of share repurchases.
- Cash and cash equivalents were $37.4 million at May 31, 2021, down from $45.1 million at February 28, 2021.
- Working capital was $484.3 million and the current ratio was 1.8:1, compared with $391.1 million and 2.1:1, respectively, in the prior-year comparison.
- Inventory increased to $540.1 million from $481.6 million at February 28, 2021; receivables increased to $406.4 million from $382.4 million.
- Total long-term debt was $511.0 million, including $498.0 million outstanding under the revolving credit agreement and $16.7 million under the MBFC Loan. The debt-to-equity ratio was 42.5%, compared with 26.6% in the prior-year comparison.
- The unsecured revolving facility has a $1.25 billion commitment, with $732.8 million available for borrowing and $19.2 million of outstanding letters of credit at quarter-end. The company was in compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales increased 28.6%, but GAAP gross and operating margins declined because of higher inbound freight costs, container shortages, less favorable Housewares channel mix and a $13.1 million EPA-related packaging write-off.
- Health & Home operating income fell to $11.2 million from $31.5 million, and its operating margin declined to 5.5% from 15.8%, primarily due to EPA compliance costs, product mix and higher freight and distribution costs.
- Beauty operating income increased to $26.4 million from $2.2 million, benefiting from operating leverage, product mix, lower royalty expense, lower inventory obsolescence and favorable foreign exchange.
- Net income and GAAP EPS declined partly because the prior-year period included a $9.4 million tax benefit related to the CARES Act. The current-quarter effective tax rate was 8.0%, compared with a 13.0% tax benefit in the prior-year period.
- Share-based compensation expense increased to $14.0 million from $9.3 million. The company repurchased 502,486 shares for $110.1 million, leaving approximately $79.6 million under the authorization.
- The company expects the transition of its Macau subsidiary from a tax holiday to a 12% statutory corporate tax rate to increase the annual effective tax rate by approximately 1.5 to 2.0 percentage points beginning in fiscal 2022.
Outlook, Commentary, Risks and Unusual Items
EPA Compliance Matter
The company is in discussions with the U.S. Environmental Protection Agency regarding packaging claims for certain air and water filtration products and a limited group of humidifiers. The EPA has not raised product quality, safety or performance issues. Helen of Troy voluntarily stopped shipments in the United States on May 27, 2021; water-filtration shipments resumed after approved labeling changes, while air-filtration and humidification products remained subject to compliance and repackaging efforts. An EPA Stop Sale, Use or Removal Order issued June 29, 2021 permits certain warehouse movements and facilitates rework.
The company expects the matter to materially and adversely affect fiscal 2022 consolidated and Health & Home sales, gross profit and operating income. It recorded a $13.1 million charge for obsolete packaging in the quarter and expects additional relabeling, repackaging, freight and storage costs. Potential customer returns, higher allowances, retailer distribution losses, fines or penalties remain possible, although no EPA fines or penalties had been imposed as of the filing.
Other Business Risks and Outlook Factors
- COVID-19 continues to create uncertain demand, store traffic, fulfillment and supply-chain effects.
- Global freight capacity constraints, port delays, higher container rates, raw-material shortages and labor shortages may increase costs and delay deliveries.
- The company has significant sourcing exposure to China and remains exposed to tariffs, trade restrictions and retaliatory measures.
- Foreign-exchange movements affect sales, costs and reported results; approximately 12% of quarterly sales were denominated in foreign currencies.
- Health & Home demand is affected by cough, cold and flu incidence, which was historically low during the 2020-2021 season.
- The company completed the sale of its Personal Care business, excluding Latin America and the Caribbean, to HRB Brands LLC on June 7, 2021 for $44.7 million in cash. The transaction was not reflected in the May 31, 2021 financial statements.
- Project Refuel is expected to be completed in fiscal 2022. Management targets annualized profit improvements of approximately $10.5 million to $12.5 million and expects total restructuring charges of approximately $10.3 million, of which $9.2 million had been incurred through the quarter.
- The filing does not provide a new quantified company-wide sales or earnings outlook.
Facts an Investor Should Verify
- Timing and scope of EPA approvals, the duration of shipment restrictions and the total cost of relabeling, repackaging, freight, storage or potential penalties.
- Whether Health & Home sales and margins recover after the EPA-related disruption and whether customer returns or retailer actions create additional exposure.
- Sustainability of sales growth in Housewares and Beauty after unusually favorable comparisons with the COVID-19-affected prior-year quarter and the benefit from Winter Storm Uri catch-up shipments.
- Progression of freight, labor, raw-material and tariff costs and their effect on gross margin.
- Working-capital requirements, inventory growth, operating cash flow conversion and the effect of continued share repurchases on debt levels.
- Future effective tax rates, including the Macau tax-status change and the absence of the prior-year CARES Act tax benefit.
- Completion economics and any subsequent effects of the Personal Care divestiture, including the option covering the Latin America and Caribbean businesses.