NWL - Newell Brands: Strategic Restructuring Should Better Position The Business

2023-05-30 22:34:29 ET

Summary

• Newell Brands' 1Q23 results showed net sales and core sales declines, validating bear case concerns, but the company reaffirmed its full-year 2023 guidance, indicating expectations of improved performance in the second half of the year.
• Recent restructuring efforts, including price adjustments and distribution center optimization, demonstrate the new CEO's commitment to improving business fundamentals.
• I recommend a hold rating for NWL, as it would be better to wait for more validation before re-evaluating the situation.

Thesis

As I mentioned previously, the odds between the Bull and Bear case for Newell Brands ( NWL ) is 50/50, and the share price action since February seems to indicate that the bear case is right (catching a falling knife). From a purely objective standpoint, I believe 1Q23 results vindicated the bear case. The fact is the results were not great at all. NWL's net sales dropped by 24% year over year in 1Q23 , and core sales dropped by 18%, both of which were below management's guidance range. The 1Q23 EPS of -$0.06 was also below expectations. However, I also think that the results were not super negative as it did come within the guided range. In addition, management has reaffirmed FY23, which suggests an acceleration of sequential growth in 2H23 due to easier comps and the back-to-school season. Even though 1Q23 results were below expectations, I found some solace in the company's reiteration of its FY23 guidance, which I had anticipated would be significantly reduced in light of the poor 1Q23 performance. Another thing I highlight is the recent restructuring exercises ( dividend cut and network optimization ). These are significant changes, and they demonstrate the new CEO commitment to putting NWL on the right track, in my opinion. I think the equity story for NWL is now cleaner as shareholders can focus on the business fundamentals, despite the fact that the dividend cut has caused the share price to drop further as dividend investors (NWL stock has a yield of 9+% before the cut) sell their take. All in all, I think NWL is slowly pivoting to having the right shareholder base, improving business fundamentals on restructuring initiatives, and a lower valuation. I continue to recommend a hold rating as I would give it another 1 to 2 quarters for more updates before evaluating the situation again.

FY23 outlook

Before going into the outlook, I think investors need to understand that the 1Q23 18% decline in core sales is not like-for-like given 1Q22 was a tough comp with sales up 6.9%. I expect this tough comp issue to continue for 2Q23 given the ongoing discretionary spending headwinds, low retail inventory sell-in, and the tough comp in 2Q22. The cold weather in 1Q23 was also one of the unpredicted pressures that caused Outdoor & Recreation to perform worse than expected, especially in the west. Given the persistent inflation situation, which has been pushing up prices on almost everything and reducing discretionary income, I anticipate that NWL will continue to face pressures on reduced discretionary spend in the future. This will also have a knock-on effect on retailers who are not stocking up inventory as they remain cautious on demand ahead.

Restructuring / Strategic improvements

While the macro situation is negative for NWL, I am encouraged to see the management initiating strategic reviews to improve the business fundamentals. Specifically, management analyzed how NWL compares to competitors and decided to raise prices on 30% of its U.S. portfolio that was not previously priced for inflation (pricing to be effective in 3Q23). Note that management may be erring on the side of conservatism in its guidance because it already factored in the negative impact on volumes resulting from this pricing action. This is significant because it proves that NWL's plans to reduce its stock-keeping units (SKUs) from 102,000 in FY18 to 28,000 in FY22 are on the right track and will help the company better understand its SKUs and its competitive standing. The pricing strategy was clearly not the end of the strategic improvement process as NWL announced on 24 May another restructuring initiative targeted at simplifying their North American distribution centre. I support this initiative because I believe it will boost the cost structure and operating margins by decreasing the number of distribution centers through the use of automation and improved logistical routes. The 8-K states that the process will begin in FY23 and be nearly complete by the end of FY24. When optimized, it is expected to have a positive financial impact of $25 million to $35 million per year before taxes. I would further add that this is not the first time NWL underwent such restructuring exercise. Project Phoenix was successfully implemented by NWL, resulting in a unified distribution and transportation structure for the company. Positive outcomes such as increased fill rates, shorter delivery times, and clearer visibility into cost savings became evident as a result. All in all, while the figure might not be huge, I think the takeaway regarding the impression of management here is very positive.

Valuation

NWL stock valuation on a forward earnings basis is now much more appealing at 8x, compared to 13x the last time I wrote about it. I believe that the weak first quarter, dividend cut, and additional restructuring exercise have created a situation in which many investors are waiting for more results before investing. I agree with this wait-and-see strategy, as I believe the weak 2Q headline result (due to tough comps and headwinds) may push the stock lower as the narrative worsens. Anyway, I would point out that if one has the risk appetite to invest at this level, the upside could be very attractive as multiples revert to average and earnings growth become more sustainable due to improved fundamentals.

Conclusion

In conclusion, the recent performance of NWL in the 1Q23 has validated some concerns from the bear case, with net sales and core sales experiencing significant declines. However, there are some positive aspects to consider. The company's reaffirmation of its full-year 2023 guidance indicates expectations of improved performance in the second half of the year, driven by easier comparisons and the back-to-school season. Additionally, the recent restructuring efforts, including price adjustments and distribution center optimization, demonstrate the commitment of the new CEO to improving NWL's business fundamentals. Despite the negative impact on the share price resulting from a dividend cut, the company's equity story is becoming clearer, allowing shareholders to focus on the improved prospects. With a lower valuation and the potential for multiples to revert to average, there could be attractive upside for investors willing to take on some risk. However, considering these factors, I recommend a hold rating for NWL, with a suggestion to reevaluate the situation after one to two more quarters for additional updates.

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