NWL - Newell Brands: A Potential Turnaround Story

2023-06-18 09:12:04 ET

Summary

• Shares of consumer products provider Newell Brands are trading at a 14-year low as demand for their products ebb in a tough macro environment.
• The company has two reorganizations in place to generate bottom-line growth, as its core top line is forecasted to fall 7% in FY23 after dropping 3% in FY22.
• With a dividend yield of 3.3%, net leverage of 5.7, and a new CEO that just took over in mid-May 2023, the recent insider buying merited a deeper dive.
• A full investment analysis follows in the paragraphs below.

"Sometimes, the best way to help someone is just to be near them ."? Veronica Roth, Divergent

Today, we take a look at a maker of many brands most of us buy on a somewhat regular basis. The stock appears cheap on the surface on a valuation basis and there has been some recent insider buying in the shares as well. An analysis follows below.

Company Overview:

Newell Brands Inc. ( NWL ) is an Atlanta based manufacturer, marketer, and distributor of consumer and commercial products, with operations in 40 countries and end markets in nearly 200. Many may not be familiar with the Newell moniker, but nearly all-American households are acquainted with one or more of its goods, including Sharpie, Coleman coolers, Elmer's Glue, Crazy Glue, Rubbermaid Tupperware, etc. So are foreign markets, which comprise ~35% of its sales. The company was formed in 1903 as a manufacturer of curtain rods, went public in 1972, and has paid a dividend every year of its publicly traded existence. Its stock trades around $8.50 a share, equating to a market cap of approximately $3.5 billion.

Approximately 27% of the company's revenue is derived from sales to Walmart ( WMT ) (14%) and Amazon ( AMZN ) (13%).

Business Segments

As part of two restructuring efforts, which will be discussed below, Newell now conducts its operations through three primary segments: Home and Commercial Solutions ((HCS)); Learning and Development (L&D); and Outdoor and Recreation (O&R).

HCS consists of commercial cleaning and maintenance solutions, home organizational systems, hygiene and material handling solutions, and household products. Notable brands include Rubbermaid Commercial, Spontex, Chesapeake Bay Candle, Yankee Candle, Mr. Coffee, Oster, Sunbeam, Calphalon, FoodSaver, and Ball. A combination of the company's former Commercial Solutions, Home Appliances, and Home Solutions divisions, it generated FY22 Adj. operating income of $217 million on revenue of $5.19 billion versus FY21 Adj. operating income of $566 million on revenue of $6.08 billion, representing declines of 62% and 15%, respectively.

L&D is comprised of infant care products, writing utensils, art products, activity-based products, and labeling solutions. In addition to the aforementioned Sharpie, Crazy Glue, and Elmer's brands, the unit includes Paper Mate, Baby Jogger, Waterman, and Graco, amongst others. It accounted for FY22 operating income of $593 million on revenue of $2.95 billion as compared to FY21 operating income of $600 million on revenue of $3.03 billion, representing decreases of 1% and 3%, respectively.

In addition to Coleman, O&R includes brands such as Campingaz, Contigo, ExOfficio, and Marmot. It was responsible for FY22 operating income of $86 million on revenue of $1.32 billion versus FY21 operating income of $90 million on revenue of $1.48 billion, representing declines of 4% and 11%, respectively. Of the three segments, O&R generated the largest percentage of its sales (44%) outside North America in FY22.

Restructurings

The company has been simplifying its operations since 2019 and is actually undertaking two restructurings, with one (Phoenix) aimed at organizational efficiency and the other [OVID] targeting customer-centric supply chain efficiency.

The latter is a multi-year endeavor to create a single integrated supply chain from its former 23 business-unit-supply chain, which will reduce administrative complexity (e.g., customers will receive one delivery and one bill from Newell, not 23 separate deliveries). Aided by the addition of distribution centers in North Carolina and Pennsylvania, the first phase of Ovid went live in 3Q22, and the second phase actuated in February 2023.

Phoenix is designed to streamline the company's operations by reducing redundancies - specifically sales, where the company will transition to a One Newell go-to-market in key international geographies as well as with its top four clients. Designed to save the company $220-$250 million annually when fully implemented (~$150 million in FY23), this initiative kicked-off in January 2023 and is expected to be completed by YE23.

In sum, the programs are designed to significantly reduce inventory, fuel, and overhead costs while reducing the number of SKUs in its inventory. Regarding the last goal, the company's simplification process has resulted in a 73% reduction in the number of SKUs it offers since 2018 to ~28,000.

Stock Price Performance

These initiatives are a function of a (then - 2019) new management team responding to falling sales and a plummeting stock price, which peaked at $55.45 a share a few months after the company merged with Jarden in 2016, essentially matching an all-time high set in 1998 ($55.19). It is also a function of a company that is at the mercy of domestic and global macroeconomic undercurrents, as it already enjoys a market leading position in the following categories: outdoor stoves; markers and highlighters; baby gear; car seats; food storage; and vacuum food sealing. As such, it is difficult to grow the bottom line through market share improvements; thus, management views operating efficiencies as an easier path to greater profitability.

Case in point: FY22 was a particularly concerning year, challenged by a strong FY21 comp, softness in global and domestic demand for its home appliances and outdoor products, the exit of 43 Yankee Candle retail stores, lost distribution in one food business product line at a key customer, supply chain shortages for its labelling products, currency headwinds, and the loss of revenue post-$593 million sale of its Connected Home & Security (CH&S) business in 1Q22.

Collectively, Newell earned $1.57 a share (non-GAAP) on revenue of $9.5 billion in FY22, as compared to $1.93 a share on revenue of $10.6 billion in FY21, reflecting a 19% decline at the bottom line and a 3% decrease at the top line after giving effect to currency translations and the sale of CH&S. Furthermore, the company experienced a cash outflow from operations of $272 million.

Its stock price, which fell to $10.44 a share during the pandemic selloff of March 2020 and rebounded to a post-pandemic high of $30.10 in May 2021, has now fallen to a level ($8.51 a share) not seen since 2009.

1Q23 Results & FY23 Outlook

Contributing to the continued slide in NWL shares was the company's 1Q23 financial report, which it announced on April 28, 2023. Newell posted a loss of $0.06 a share (non-GAAP) on revenue of $1.81 billion versus a gain of $0.35 a share (non-GAAP) on revenue of $2.39 billion in 1Q22, reflecting a 24% (18% core) at the top line.

The bottom line was $0.03 worse than analyst expectations and the top line was $10 million better than consensus, both guided much lower during the 4Q22 financial report. The excuses were essentially the same as in FY22: " slowing retail sales, rising household debt, and persistently high…inflation on essentials ," as well as forex headwinds.

Underperformance versus the prior-year period was across the board, led by O&R, which experienced core sales decline of 27%; HCS dropped 19%; and L&D fell 11%.

Management maintained its FY23 guidance range of $0.95 to $1.08 a share (non-GAAP) on revenue of $8.4 to $8.6 billion - reflecting drop-offs of 35% and 11% (7% core) at the midpoints, respectively - but suggested that both metrics would finish the year in the lower end of their respective ranges. As far as management, a new CEO (current President Chris Peterson) will assume the reins in mid-May 2023.

In response to the news, shares of NWL sold off 11% in the subsequent trading session to $10.81.

Balance Sheet & Analyst Commentary:

Furthermore, the company experienced a $77 million cash outflow in 1Q23 (versus a $272 million outflow in 1Q22) yet expected FY23 operating cash flow of $800 million (based on a range midpoint) due to $1.1 billion of working capital improvements. On March 31, 2023, Newell held cash and equivalents of $271 million against debt of $5.63 billion, giving it a concerning net leverage of 5.7.

In mid-May, the company slashed its dividend payout by 70% to shore up its balance sheet and improve cash flow. The shares now yield 3.3%. This action will save approximately $265 million in cash annually.

The Street is a mixed bag on its outlook for Newell, featuring one outperform and four buy ratings against five holds and one underperform. Their median twelve-month price objective is around $13 a share. On average, they expect the company to earn $0.97 a share (non-GAAP) on revenue of $8.5 billion in FY23, followed by $1.25 a share (non-GAAP) on revenue of $8.73 billion in FY24, reflecting a belief in Newell's restructurings to grow its bottom line 32% in FY24 over FY23, despite only growing the top line by 4%.

CFO Mark Erceg is a believer in this approach, plunking down $1 million to purchase 100,100 shares of NWL at an average price of $9.98 on May 3-4, 2023.

Verdict:

The company's operating cash flow of $700 million to $900 million seems unlikely to be achieved with a $77 million outflow to start the first quarter of the year. Granted, Newell's operating cash flows are stronger in the second half of the year with seasonality of sales, timing of performance-based compensation payments, working capital requirements, and customer credit terms all impacting the metric - and at some point, forex headwinds will abate.

However, its midpoint FY23 operating cash flow outlook of $800 million while expecting to earn $1.02 a share (non-GAAP) does not seem congruent after generating FY22 operating outflows of $272 million while earning $1.57 a share (non-GAAP). Obviously, gains will have to come through inventory reduction, which management believes will improve ~$700 million over FY22; and accounts receivable/accounts payable, which is forecasted to improve by $400 million. These working capital dynamics will coalesce to form a one-time event as a means of enduring FY23, with the intimation that management is anticipating a significant amount of help from pricing increases to clients for 30% of its domestic portfolio in 2H23 - mostly in the HCS segment - as well as from its implemented efficiency improvements in the back half of the year and beyond. However, these moves may be met with further reduced demand from a debt-ridden consumer and further offset to some extent by higher per capita labor costs and additional investments in the business - capex will be ~$300 million in FY23.

With net leverage of 5.7, cutting the dividend in favor of paying down debt is the prudent decision. In the meantime, an 8.8 forward PE multiple for a mature business with an uncertain outlook that is relying on a strong 2H23 is a fair but not compelling valuation. Therefore, I would wait for more signs of a turnaround before purchasing shares in NWL.

"Perhaps home is not a place but simply an irrevocable condition. "? James Baldwin

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