HELE - Helen Of Troy: Shave Trading Gains Let The Rest Run

2024-01-08 16:09:13 ET

Summary

• Helen of Troy Limited reported strong fiscal Q3 results, exceeding expectations on both the top and bottom lines.
• Sales figures were slightly down from last year but better than expected, with gross margins continuing to improve.
• CEO Julien Mininberg will be retiring in March, but the management team remains strong, and the company is focused on margin expansion and expense control.
• Up 20% on the Helen of Troy Limited trade, take some profit, and let the rest run.

Earnings season for the last quarter of calendar 2023 is just about to get started, and one of the stocks we often trade is Helen of Troy Limited ( HELE ), an early reporter before the banks traditionally kick off earnings. After last earnings, we called for a buy in shares on weakness, and we think the upside remains. While there are some concerns at the macro level of a slowdown in the economy, for now, it remains strong. The stock remains heavily shorted , at over 17% interest, and shares look like they are squeezing a bit recently and following the just-reported earnings. In this column, we review the just-reported fiscal Q3 earnings , which were strong.

Fiscal Q3 Headline Results Strong

Results exceeded consensus expectations on both the top and bottom lines. Here in Q3, Helen of Troy reported solid results in its Leadership Brands, and international performance was particularly strong once again. Inventory is in good shape, and the balance sheet gets better and better. In fact, inventory was down over $110 million from a year ago. Further, free cash flow ("FCF") year-to-date improved to $202.8 million, compared to free cash flow of negative $96.7 million for the same period last year, which includes $16.8 million and $125.8 million of capital expenditures for Helen of Troy's new Tennessee distribution facility, respectively, for each period.

The company reported sales figures that were down slightly (as expected) from last year, but sales were better than expected. Further, gross margins continue to improve. The restructuring efforts put into place several quarters ago have been very beneficial, and we like that the company has moved inventory, while leverage on the balance sheet is coming down steadily. We were expecting sales to be down about 3-5% overall, but sales came in down 1.6% to $549.6 million, and this was an $8.5 million beat versus estimates. Sales declines were organic this quarter, whereas in the past sales had fallen as a result of the sales of business lines. Organic sales dipped $13.6 million from a year ago. Home and outdoor sales were up $4.5 million while Health and Beauty sales were down $18.1 million.

These results were due to a decline in sales of hair appliances, humidification, and air filtration products in Beauty & Wellness driven by softer consumer demand. There was also a much later start to the cold and flu, and SKU rationalization efforts also hit revenues. There were also lower sales in the insulated beverageware category, but higher online channel sales, and higher sales of thermometry, heaters, and water filtration products in Beauty & Wellness.

As mentioned, we like what we are seeing with margins. Gross profit margin increased 210 basis points to 48.0%, up from 45.9% from a year ago, and was up from 46.7% in the sequential fiscal Q2. These margins, combined with lower selling and admin expenses and higher-than-expected sales, led to an earnings beat. Net income was $75.9 million, compared to $51.8 million a year ago, while EPS was $3.19 and rose from $2.15 a year ago. Adjusted EPS increased 1.5% to $2.79 compared to $2.75 a year ago. This surpassed estimates by $0.04.

Rest of Fiscal 2024 Outlook

The fiscal Q3 results were strong overall on the headline numbers and tacked on to a strong fiscal Q2. One negative is that Julien Mininberg, long-time CEO, will be retiring in March. But he stated:

As my planned retirement approaches on March 1, 2024, I am proud of the Company's Transformation over the past decade and the significant value it created for all stakeholders. We transformed Helen of Troy from a holding company into a unified global operating company with an outstanding portfolio of market-leading brands

We still like the management team here, and the chief operating officer, Noel Geoffroy will take over the helm as CEO. As we look ahead, we continue to like the margin expansion and the work to control expenses, as well as working to reduce leverage to under 2.0X by the end of the fiscal year. EPS was guided in the range of $8.60 to $8.85, which implies an adjusted diluted EPS decline of around 6% at the midpoint from fiscal 2023. The company also expects EBITDA of around $330-335 million, a touch lower than the prior $350 million previously seen.

While Helen of Troy Limited's earnings are falling this year, earnings are likely to improve going forward beyond fiscal 2024 with higher margins and a leaner operation. At the current price of $120 a share, we are trading at about 13.7X FWD EPS, which is still way below the historical multiple. However, we are up 16.5% on our last buy call, or up over 20% if you were patient enough to wait for sub $100. We think you take some profit here, consider selling 30% of the position to take some off, but let the rest of the position run some more.

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