2023-09-18 15:47:25 ET
Summary
- Helen of Troy Limited's M&A strategy backfired, leading to a decline in sales and earnings and the resignation of the CFO.
- The company is a collection of consumer brands with strong growth potential and high cash flows.
- Despite challenges, Helen of Troy has seen a substantial recovery in its share price and is working to reduce leverage concerns.
In March, I believed that M&A machine Helen of Troy Limited ( HELE ) had come to a standstill. Regarded as a solid value creator through such acquisition efforts in recent years, this strategy backfired in recent times. A reversal of pandemic induced demand trends, lack of execution and leverage incurred made the situation look quite dicey, certainly as the CFO resigned as well.
This cocktail of bad news prevented me from doubling down on a position, unfortunately. With the 2024 guidance being a bit underwhelming, with sales and earnings down small, the situation can hardly be called appealing, but stabilization is enough at these depressed levels. This comes as some deleveraging (amidst inventory cuts) quickly dissipates some leverage concerns.
A Collection Of Consumer Brands
The paragraph header is basically what Helen of Troy is about. The company is a collection of consumer brands with leading positions in niche segments, including the likes of Oxo, Vicks, Braun, Drybar and other brand names. The idea is that solid growth, a strong brand positioning, high margins and low reinvestment requirements results in a steady stream of huge cash flows from a portfolio of such brands.
After becoming a shareholder soon after the pandemic, shares quickly recovered to the $200 mark later that year, to peak around $250 in 2021. The strong share price performance was driven by strong fiscal 2021 results (reported in April 2021) with sales increasing to $2.1 billion as operating margins rose 3 points to 13% of sales. This resulted in a spectacular $10 earnings per share number, all while leverage was fairly limited at a number equal to reported EBITDA.
The company used the strong operating momentum to announce a $414 million deal for Osprey Packs in the fall of 2021, adding technical and every day packs to the line-up of the business, as well announcing a $150 million deal for prestige hair care business Curlsmith early in 2022.
There were some hiccups however as pandemic-related demand trends were reversing as the company faced issues with the EPA regarding claims of packing claims in water and filtration products. While 2022 sales (reported in April 2022) rose 6% to $2.2 billion, earnings were down to $9 and change, although that adjusted earnings came in at $12 per share.
The slower growth, EPA issues and incurred debt made investors cautious, as the company originally guided for 2023 sales to rise by 7-9%, with GAAP earnings largely seen around the $10 per share mark. While the guidance was soft already, the company cut the full year sales guidance to $2.0 billion and change, with earnings seen down to just $5 per share (based on GAAP accounting) as the year progressed.
This reduced operating performance and poor working capital conversion made that net debt came in around a billion, resulting in a roughly 3 times leverage ratio. These conditions and an unexpected CFO resignation sent shares to lows of $90 in March, as I was a bit cautious to get involved, even though I would like to buy the dip after I held half of my original position.
A Substantial Recovery
Shares fell to a low of $80 in April as Helen of Troy announced a succession plan for its CEO role as well, very disappointing and concerning after the CFO resigned just a couple of weeks before. This was followed by the release of the 2023 results with sales down 7% to $2.07 billion as EBITDA fell 13% to $327 million, with adjusted earnings down to $9.45 per share, largely in line with the latest revised outlook for the year.
Promising was that net debt fell towards the $900 million mark, as the fiscal 2024 outlook was not too convincing with sales seen at a midpoint of $1.99 billion, plus or minus $25 million. On top of a smaller revenue decline, the company guided for adjusted earnings to fall to $8.50-$9.00 per share, although it was promising to see net debt coming down.
Shares recovered in a spectacular fashion to $140 in July as quarterly earnings provided a real sense of relief. This came as first quarter sales fell nearly 7% to $475 million with adjusted earnings falling to $1.94 per share. These results were largely in line with expectations and even as the company maintained the full year guidance, shares jumped in a spectacular fashion to levels in the $130s.
The company did manage to cut inventories in a big way which made that net debt fell to $800 million as the business was continuously haunted by the EPA issues, as well as the bankruptcy of Bed, Bath & Beyond. With leverage seen just over 2 times here, and EBITDA seen at nearly $350 million (at the higher end of the range), the company targets net leverage at 2 times by year-end (fiscal year 2024 that is).
With the quarterly earnings report not showing positive surprises, I was puzzled behind the move higher in the share price, and hence I am not surprised to see that shares have given up many of these gains, now trading at $115 per share.
Based on the earnings power this year, a 13–14 times multiple looks quite reasonable and appealing. Note however that this excludes for about $1.50 per share in stock-based compensation expenses, which are kindly excluded in the adjusted earnings guidance. This makes that shares trade at 16-17 times earnings, a multiple which looks a lot less compelling early.
This is certainly the case if growth can return, and certainly as leverage concerns are alleviated with net debt rapidly coming down here.
A Final Word
With Helen of Troy Limited shares up some 25-30% since I last looked at the shares in April, shares have done alright, although that levels in spring were quite depressed. Part of the move higher might be the results of short interest in the stock, as I feel more comfortably about the business and its long-term potential here.
Not believing that there is a fundamental problem, I am happy to consider a greater allocation here, certainly if Helen of Troy Limited shares dip a bit further here in the fall.
Hence, I continue to hold a modest long-term long position, as there are really hiccups in the long-term growth story, with real execution and back luck hurting the results. While leverage concerns appear to be alleviated, long-term appeal is seen, but some real execution is required here.
For further details see:
Helen of Troy: A Recovery Amidst Some Signs Of Stabilization