Energizer Reports Mixed 1Q
Energizer Holdings Inc. (ENR) reported first quarter 2013 non-GAAP EPS of $2.20, which exceeded the Zacks Consensus Estimate by 4 cents. EPS improved 7.3% year over year and 25.0% sequentially primarily due to stringent cost control in the last quarter.
Revenues
Revenues declined a modest 0.5% year over year but increased 4.3% sequentially to $1.19 billion in the reported quarter. However, it fell short of the Zacks Consensus Estimate of $1.21 billion.
The year-over-year decline was primarily due to weak organic sales (down 0.3% year over year) and unfavorable foreign exchange (negative impact of 0.2%). Revenue growth suffered due to declining market share in the battery segment.
Personal Care (46.5% of revenue) decreased 1.8% year over year to $554.3 million. Organic sales declined 1.4% year over year, primarily due to weak sales in Wet Shave and Infant Care product segments, which declined 3.9% and 8.3% on a year-over-year basis, respectively. Feminine Care remained flat on a year-over-year basis, while Skin Care revenues jumped 11.3% from the year-ago quarter.
Personal Care revenue declined 6.1% sequentially as sales declined across all the segments. Wet Shave, Skin Care, Feminine Care and Infant Care plunged 8.7%, 4.4%, 7.5% and 12.4%, respectively. Hydro franchise grew 26.0% year over year in the quarter. However, this strong growth was fully offset by weak performance from Quattro line of products.
Household Products (53.5% of total revenue) increased 0.7% year over year to $638.2 million. Organic sales increased 0.8% on a year-over-year basis, driven by 2.0% increase in alkaline battery sales. The increase in alkaline sales was driven by approximately $18.0 million of incremental sales related to the impact of Hurricane Sandy.
Excluding this incremental volume, organic sales would have declined 2.0% from the year-ago period due to continued category declines and lower market share in the U.S.
On a sequential basis, Household products jumped 15.4%, primarily due to incremental sales related to Hurricane Sandy and improved pricing.
Margins
Gross margin was flat on a year-over-year basis at 47.1%, as favorable pricing in Household products was fully offset by unfavorable product mix. Gross margin expanded 100 basis points (“bps”) on a sequential basis.
Operating margin increased 50 bps from the year-ago quarter and 380 bps on a sequential basis to 23.2% in the reported quarter. This strong improvement was primarily driven by lower spending on advertising and promotion (A&P), selling, general and administrative expenses (SG&A) and research and development expenses (R&D) in the quarter.
SG&A expense as a percentage of revenues declined 110 bps from the year-ago quarter and 200 bps on a sequential basis. This was primarily due to lower compensations costs, effective cost control and improving unfunded deferred compensation liabilities. A&P expense also declined 10 bps from the year-ago quarter and 80 bps sequentially.
As a result of improving operating margins, net margin increased 10 bps on a year-over-year basis and 170 bps sequentially to 11.5% in the reported quarter.
Balance Sheet & Cash Flow
Cash and cash equivalents were $787.1 million at the end of first quarter compared with $718.5 million at the end of the fourth quarter. Long-term debt remained flat sequentially at $2.14 billion. Cash flow from operating activities was $71.6 million in the reported quarter.
Guidance
Energizer reiterated fiscal 2013 adjusted EPS guidance in the range of $6.75 to $7.00 per share. From the sales perspective, management expects mid-single digit sales growth in the Personal Care segment. For the Household Products segment, management continues to expect a decline in low-single digits primarily due to lower volumes.
In Nov 2012, Energizer announced a restructuring program to be completed over the next two years that is expected to yield pre-tax cost savings of $200 million on an annualized basis. Management expects this 75% of the cost savings initiative to improve profitability and the rest would be ploughed back into the business for long-term growth perspective. The company expects this savings to accrue from the second quarter of 2013.
Recommendation
We believe that product innovations coupled with higher pricing of Energizer’s household products and the restructuring initiatives would positively impact its results going forward. Moreover, lower-than-expected operating expenses and prudent product mix would expand margins in the near term.
However, declines in volumes in the battery category, unfavorable foreign exchange and increasing competition from companies such as Panasonic Corp. (PC), Kimberley-Clark Corp. (KMB) and Procter & Gamble Co. (PG) are the near-term headwinds.
Currently Energizer has a Zacks Rank #3 (Hold).
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