HELE - Helen of Troy: Under Siege

2023-10-04 11:55:04 ET

Summary

• Helen of Troy Limited stock is under siege with over 20% short interest.
• Q2 headline results were strong, with revenue beating expectations and improvements in gross margin and cash flow.
• Fiscal 2024 outlook was reiterated, and leverage is being reduced.

Earnings season is just about to get started, and one of the names we follow for trading is Helen of Troy Limited (HELE). A lot of retailers have been crushed by inflation, and now that we are starting to come out of the other side of that, we are in a market situation where consumer discretionary names have been absolutely crushed. The last two months has seen a massive correction in nearly every stock within this sector.

There are exceptions, but many of the charts look eerily similar. This is because we are starting to see the cracks in economic data just starting to form. We also have the very real threat of the return of student loan repayments where millions of American's budgets will now have to adjust to hundreds of dollars being taken out of their monthly budgets after over three years of no payments. This will be a massive change. While we do believe the end is in sight for interest rate hikes, the impact of student loan repayment is a very real risk.

Still, for now, the economy remains strong, and retailers that have worked to adapt, like Helen of Troy. Helen of Troy stock is actually under siege right now. The stock is heavily shorted , with over 20% short interest. However, shares have been knocked down to levels that are a buy once again for a trade in our opinion. Performance is mixed overall for the company, but there is lots of improvement. The company just reported earnings , and those results were strong on the headline results but mixed on the outlook. Shares are taking another haircut this morning. In this column we check in on performance.

Q2 headline results strong

Fiscal Q2 results were well ahead of consensus expectations on both the top and bottom lines. Here in Q2, the company delivered on its revenue expectations for the majority of its so-called Leadership Brands and international performance was particularly strong. The company seeks ongoing growth through important new product launches, while significantly increasing gross margin. We also liked that the company continues to return value to shareholders through share repurchases. Moreover, the company has worked to streamline its inventory and has made efforts to improve free cash flow to continue to deliver strong results.

In fact, inventory down over $200 million in the first half of this fiscal year versus the same period last year, and free cash flow improved by $325 million in H1 2023. The company reported sales figures that were down from last year, though this was expected. While sales were down, as expected, we were impressed to see the company improve gross margin, and cash flow improved significantly during the quarter, and the first half, compared to last year. As the company moves forward, the prior restructuring efforts are bearing fruit, as noted the inventory situation has improved markedly, and leverage is on the way down. This is very healthy for the long-term.

We were expecting sales to be down about 7-8% overall, but sales came in down 5.7% to $491.6 million, and this was a $6.3 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 $31.2 million, or 6.0%. The company saw lower sales of heaters, fans, and humidification products in Beauty & Wellness. Some of this is from the pain retailers are feeling, as there was reduced orders from retail customers as they rebalance their inventories in certain categories to combat weakness they are noting in stores.

This is not specific to Helen of Troy, but does impact them. Sales were also hit by a decline in Home & Outdoor primarily due to lower sales in the insulated beverage category. Online channel sales improved and there was stronger consumer demand for travel-related products in Home & Outdoor and overall growth in Beauty and International. While higher revenues than expected were great, we really like what we are seeing in margins which improved, which also helped deliver an EPS beat.

Gross profit margin increased 420 basis points to 46.7%, up from 45.4% in the sequential quarter, and up from 42.5% a year ago. This is strong and perhaps the most bullish point of the quarter. This was also a strong reason that EPS beat. The increase in gross profit margin was due to lower freight costs, and the companies' efforts to modernize their SKU mix. There was also some pricing power impacts.

Net income was $27.3 million, compared to $30.6 million a year ago, while EPS was $1.74 and beat estimates by $0.07, though was still down from a year ago. Shares a down today, despite the company reiterating their outlook

Fiscal 2024 outlook

The fiscal Q2 results were strong overall on the headline numbers, and the work put in by management to improve their position is paying off. Still, the shorts are on attack, but the strong outlook remains in place. Julien Mininberg, CEO, stated :

Looking ahead, I am pleased to be in a position to reiterate our full year outlook for this fiscal year. Our year-to-date results not only demonstrate strong execution across our entire organization, they also demonstrate resiliency as we navigate the continued challenging macro consumer environment.

We still like the management team here. We 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 $8.50 to $9.00, which implies an adjusted diluted EPS decline of 10.1% to 4.8% from fiscal 2023. The company also expects EBITDA around $350 million. While the earnings are falling this year, earnings are likely to improve going forward beyond fiscal 2024. At the current price of $103 a share, we are trading at about 11.8X FWD EPS, which is way below the historical multiple. We see upside from here, and think it sets up for a trade.

Looking ahead

Helen of Troy Limited stock is under siege, but shares are cheap, especially since we see EPS growth in the future after this fiscal year. Cash flow is improving. Debt is being reduced as is leverage. The company is buying back shares and has improved margins. While the short interest gives us pause, when we emerge from the seasonal weakness we are in, we believe shares will appreciate. Start buying, especially under $100.

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