HELE - Helen of Troy: Righting The Ship

Summary

• Helen of Troy put out a beat and raise in its fiscal Q3 earnings report.
• Inventory levels are improving, cash flow is increasing, and there is further streamlining of the company being done.
• We rate shares Helen of Troy a buy under $100.

Well, this market continues to stink. We started 2023 just like we ended 2022, with losses. It has been mixed and volatile, but more red days than green the last 6 weeks, and that is painful. More pain may be ahead as earnings season begins. While it will really pick up later this month, we begin earnings season in our opinion really this week.

While there have been some signs of life in retail, that sector has seen huge bouts of selling The market has been in bear mode for almost a year, with only select rallies. 2022 saw only energy as a positive sector, there was red everywhere else. A lot of retail stocks have largely been crushed thanks to inflation in the price of nearly everything over the last year, and the Fed's actions to fight the inflation through rate hikes. It is our opinion that earnings estimates will be coming down from many companies this earnings season due to the pressure on businesses. While we do not know how far the Fed will go, or how far they will actually raise rates, retail was hit hard through this hiking cycle.

One name that we trade a lot is Helen of Troy Limited ( HELE ). The company just reported earnings , and those results were strong to be honest, but the outlook seems to suggest perhaps it is not as dire as it seems. The company has been righting the ship. Let us discuss, and check back in on Helen of Troy's performance and further discuss what we see ahead for the rest of fiscal 2023.

Discussion

The company has seen some real shifts in strength and weakness over the last few years. Before the pandemic, we saw the company making big moves in health/nutrition products and in beauty. When the pandemic landed, we saw amazing trends in sales of the VICKS line of products. Now that we have emerged from the pandemic, there has been a reduction in health supply sales, though beauty trends seem to be on the increase as people are back out socializing, in the work place again, and really just living normal life. As a whole, sales fell from last year's fiscal Q3, but trends shifted because last year's sales were still impacted by Vicks since much of the world was still uncertain about the pandemic and was buying up home remedies for the Delta and then the Omicron variants. But fiscal Q3 results were well ahead of consensus expectations .

Headline results impress

Here in Q3, shifts in consumer preferences and COVID-19 moving to more of an endemic condition led to changes in sales trends for the company. Now we do have a pretty strong flu season underway, and that may have helped the tail end of the quarter to a degree for some of those health-related products. The company reported sales figures that were down from last year. While the operating environment remained difficult for many, we were pleased to see the company improve gross margin, and cash flow improved significantly during the quarter. On top of that, the restructuring efforts are paying off and they have been able to reduce inventory. Inventory levels are now below where they finished last fiscal year. Many retailers have far too much inventory, so this was solid.

We were expecting sales to be down about 15% overall, but sales came in down 10.6% to $558.6 million, and this was a $25 million beat versus estimates. That was welcomed news. While higher revenues than expected were great, we liked that margins improved, which also helped deliver an EPS beat. Gross profit margin increased 2.1 points to 45.9%, compared to 43.8% a year ago. The increase in gross profit margin was due to a favorable mix of more Home & Outdoor sales within consolidated net sales revenue, a more favorable customer mix within the Home & Outdoor segment, and a more favorable product mix within the Beauty segment primarily due to the recent acquisition of Curlsmith. We were pleased with the results, though selling and admin expenses were up slightly due to higher wages and marketing expenses. Net income was $51.8 million, compared to $75.7 million a year ago, while EPS was $2.15, compared to $3.10. Adjusted EPS decreased 26.1% to $2.75 compared to $3.72. The decrease in adjusted diluted EPS was primarily due to lower adjusted operating income, higher interest expense and an increase in the effective income tax rate, but keep in mind, it was much better than expected, beating by $0.15. The strong results led to raised guidance for the fiscal year

Outlook strengthens, but more work to be done

Make no mistake, the fiscal Q3 results were strong overall on the headline numbers. A beat versus expectations is always welcomed, and the company raised their outlook for the fiscal year. Shares are down, but we think this is a bit of a bad beat here. Shares should be higher based on forecasts and valuation. Julien Mininberg, CEO summed things nicely in the release :

Regarding our outlook for this fiscal year, we are raising the bottom of our range for both sales and adjusted EPS. Consumption remains soft in certain of our categories and some retailers are continuing to reduce their orders as they sell down their inventory. We are, however, encouraged to see trade inventory at some key retailers start to better align with sell through, as well as stabilization and modest improvement in market share for certain categories such as Beauty appliances. W e made significant progress on each of the workstreams comprising Project Pegasus. Today we are announcing three major changes intended to streamline and simplify the organization. First, we are combining Beauty and Health & Wellness into a single reportable segment that will be referred to and reported as “Beauty & Wellness.” Second, we are creating a North America Regional Market Organization (RMO) that will be responsible for sales and go to market for all categories and channels in the United States and Canada. Third, we are further centralizing certain functions under shared services, especially in Operations and Finance

So the company continues its work to streamline the business and improve margins. We like the management team here, always have. With the new moves, we expect the company continues to work through this soft period, and emerges leaner and stronger. The company upped its forecast for results as well.

While the company seeks to cut expenses, EPS is going to crater from where it was, but the company did up its guidance for the fiscal year. Coming into this report the company was expecting adjusted EPS would fall to $9.00 to $9.40. It now sees $9.20-$9.40 in EPS, which assigns a 10.5X FWD EPS multiple, which is quite cheap. While calendar 2023 will likely see a bottom in performance, our early estimates are for no worse than $9.50 in fiscal 2024 EPS. Shares are definitely cheap right now, even with low growth. But cheap can get cheaper if things worsen and the multiple compresses or EPS gets drastically reduced.

Looking ahead

Helen of Troy Limited stock is cheap, though it can always get cheaper. We love that Helen of Troy management has implemented plans to reduce inventory levels and that is working, and they are improving cash flow and working capital. While the Helen of Troy Limited operating environment remains soft, we expect a strong second half of the year. At this point, we rate shares a buy under $100.

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