Helen of Troy Limited — Form 10-Q Summary
Business context and reporting period
Helen of Troy Limited is a Bermuda-based consumer products company with two reportable segments: Home & Outdoor and Beauty & Wellness. The filing covers the quarter and nine months ended November 30, 2023, representing the third quarter and first nine months of fiscal 2024. The business is seasonal, with historically higher sales and operating income in the third fiscal quarter.
The company’s brands include OXO, Hydro Flask, Osprey, Vicks, Braun, Honeywell, PUR, Hot Tools and Drybar. Prior-period segment information was recast after Health & Wellness and Beauty were combined into the Beauty & Wellness segment.
Key financial metrics
| Metric | Three months ended Nov. 30, 2023 | Year-over-year change | Nine months ended Nov. 30, 2023 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $549.6 million | Down 1.6% | $1,515.8 million | Down 4.5% |
| Gross profit | $263.8 million | Up 2.8% | $709.1 million | Up 2.9% |
| Gross margin | 48.0% | Up 2.1 percentage points | 46.8% | Up 3.4 percentage points |
| Operating income | $106.9 million | Up 38.5% | $194.4 million | Up 23.0% |
| Operating margin | 19.5% | Up 5.7 percentage points | 12.8% | Up 2.8 percentage points |
| Net income | $75.9 million | Up 46.4% | $125.9 million | Up 17.5% |
| Diluted EPS | $3.19 | Up from $2.15 | $5.25 | Up from $4.45 |
| Adjusted operating income | $89.8 million | Down 3.1% | $218.3 million | Down 6.8% |
| Adjusted diluted EPS | $2.79 | Up from $2.75 | $6.45 | Down from $7.44 |
Quarterly GAAP results benefited materially from a $34.2 million gain on the sale and leaseback of the company’s El Paso distribution and office facilities. Excluding specified unusual and non-cash items, adjusted operating margin declined to 16.3% from 16.6% in the quarter and to 14.4% from 14.8% year to date.
Segment performance
- Home & Outdoor: Third-quarter sales increased 3.1% to $235.9 million; nine-month sales decreased 1.5% to $693.1 million. Quarterly operating income was $49.5 million, including a $16.2 million share of the facility-sale gain. Adjusted operating income was $39.8 million, down 0.2%.
- Beauty & Wellness: Third-quarter sales decreased 4.9% to $313.7 million; nine-month sales decreased 7.0% to $822.8 million. Quarterly operating income was $57.4 million, including an $18.0 million share of the facility-sale gain. Adjusted operating income was $50.1 million, down 5.2%.
- Online channels: Sales to retail customers fulfilling online orders and direct-to-consumer online sales represented approximately 31% of consolidated sales in the quarter and 28% year to date, growing approximately 15% and 14%, respectively.
Cash flow, balance sheet, debt and liquidity
| Metric | Nov. 30, 2023 | Feb. 28, 2023 |
|---|---|---|
| Cash and cash equivalents | $25.2 million | $29.1 million |
| Current assets | $956.4 million | $892.0 million |
| Inventory | $426.0 million | $455.5 million |
| Total debt, including current maturities | $735.6 million | $934.4 million |
| Total stockholders’ equity | $1.586 billion | $1.489 billion |
- Operating cash flow for the first nine months was $232.5 million, compared with $49.5 million in the prior-year period.
- Investing activities provided $14.0 million, compared with $290.7 million of cash used in the prior-year period. Capital and intangible asset expenditures were $29.7 million, down from $146.2 million, primarily because the new distribution facility was completed in March 2023.
- Financing activities used $250.3 million, including $195.0 million of net revolving-loan repayments and $54.8 million of share repurchases and equity-plan withholding payments.
- The Credit Agreement had $737.2 million of principal outstanding, $739.5 million available for additional borrowings and $15.5 million of outstanding letters of credit. The facility matures March 13, 2025.
- Borrowing rates were floating, with a weighted average rate of 7.1% at November 30, 2023. Interest-rate swaps hedged $625.0 million of outstanding borrowings.
- The company was in compliance with all debt covenants. Covenants effectively limited additional debt capacity to $336.2 million, or $569.6 million following a qualified acquisition.
Material changes versus the prior comparable period
- Sales declined because of softer consumer demand, retailer inventory rebalancing, SKU rationalization and weaker sales of certain Beauty & Wellness products, including hair appliances, humidification, air filtration and fans.
- Gross margin improved primarily from lower inbound freight, SKU rationalization and favorable customer mix. The nine-month comparison also benefited from the absence of $22.1 million of EPA compliance costs recorded in the prior-year period.
- SG&A benefited from lower salary and wage costs following Project Pegasus workforce reductions, lower freight costs and the $34.2 million facility-sale gain. These benefits were partly offset by higher marketing and incentive compensation expense, distribution costs and bankruptcy-related charges.
- Interest expense increased 52.0% year to date to $40.6 million because of higher average interest rates, despite lower average debt.
- The Curlsmith acquisition contributed $6.1 million of incremental nine-month sales, as the current period included a full period compared with approximately 32 weeks in the prior-year period.
- The company repurchased 381,200 shares in the open market for $50.0 million during the first nine months and had $348.8 million remaining under its repurchase authorization at November 30, 2023.
Guidance, outlook, management commentary and risks
- Project Pegasus: Management expects total one-time pre-tax restructuring charges of approximately $60 million to $65 million through fiscal 2025. The company had incurred $42.2 million since inception, including $14.9 million in the first nine months of fiscal 2024.
- Project Pegasus is targeted to generate annualized pre-tax operating profit improvements of approximately $75 million to $85 million, substantially achieved by the end of fiscal 2026. Management expects approximately 25% of savings in fiscal 2024, 50% in fiscal 2025 and 25% in fiscal 2026.
- The company plans to consolidate its U.S. Beauty operations in El Paso and Irvine with its Wellness operations near Boston, with completion expected during fiscal 2025.
- Management expects further debt repayment during the remainder of fiscal 2024 and believes operating cash flow and available financing will fund foreseeable liquidity requirements.
- Macroeconomic risks include inflation, elevated interest rates, weaker consumer confidence, retailer inventory adjustments, geopolitical events and potential supply-chain disruption. The company expects higher interest rates to continue increasing interest expense.
- Manufacturing is concentrated among unaffiliated suppliers, primarily in China, Mexico, Vietnam and the United States. The company is exposed to tariffs, trade restrictions, foreign-exchange movements and transportation costs.
- Brita LP’s appeal of the International Trade Commission’s September 2023 determination in Helen of Troy’s favor remains pending. The related patent litigation remains stayed, but an adverse outcome could materially affect financial position and results.
- The company reported no EPA compliance costs in the current quarter or year to date, but stated that future fines or penalties related to packaging claims cannot be ruled out.
- The filing states that disclosure controls and procedures were effective and that there were no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether reported operating-margin improvement is sustainable after removing the $34.2 million facility-sale gain and other unusual items.
- Whether Beauty & Wellness sales stabilize after year-to-date declines and continued SKU rationalization.
- Progress toward the $75 million to $85 million Project Pegasus annualized savings target and the remaining restructuring charges.
- Debt refinancing or repayment plans before the March 13, 2025 Credit Agreement maturity, including exposure to floating interest rates.
- Whether operating cash flow remains strong as receivables, retailer credit conditions and consumer demand evolve.
- The outcome and timing of Brita’s Federal Circuit appeal and the related stayed patent litigation.
- Future effects of inflation, interest rates, retailer inventory levels, supply-chain constraints, tariffs and foreign-currency movements.
- Actual cash costs and benefits associated with the U.S. Beauty and Wellness geographic consolidation.