Can Cost Efforts Aid Spectrum Brands (SPB) Amid Muted Demand?
Spectrum Brands SPB has long benefitted from its Global Productivity Improvement Plan and strategic transformation initiatives to streamline its organizational structure. Notably, shares of this Zacks Rank #3 (Hold) company have gained 13% in the past three months compared with the industry’s growth of 3.8%.
Additionally, an uptrend in the Zacks Consensus Estimate echoes the same sentiment. The Zacks Consensus Estimate for SPB’s fiscal 2023 earnings for the current financial year has risen 44% in the past 30 days.
Let’s delve deeper into the factors driving the stock.
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Growth Pillars
Spectrum Brands is on track to improve operational efficiencies throughout and limit risks. Management is protecting and deleveraging its balance sheet, while solidifying liquidity. It is focused on transforming the company into a pure-play global Pet and Home & Garden business.
As part of its strategic transformation, the company completed the sale of HHI to ASSA ABLOY for $4.3 billion in cash on Jun 20, subject to customary purchase price adjustments. It expects $3.8 billion in net proceeds from this sale. With the sale of the HHI business, the company can now refocus on its core businesses and boasts a stronger balance sheet.
The company’s Global Productivity Improvement Plan, which aims at improving the company's operating efficiency and effectiveness, while focusing on consumer insights and growth-enabling functions, bodes well. The majority of savings are expected to be reinvested into growth initiatives and consumer insights, R&D, and marketing across each business. This plan will also enable the company to deliver value creation and sustainable growth in the long term.
Moving on, better pricing, cost improvements and a favorable mix contributed to the third-quarter fiscal 2023 gross margin, which expanded 210 bps to 35.8%. Adjusted EBITDA advanced 23% to $98.5 million and beat our estimate of $89.3 million. The adjusted EBITDA margin expanded 360 bps to 13.4%, driven by lower distribution costs, fixed-cost-reduction initiatives and positive pricing impacts, partly offset by the reduced volume.
Consequently, third-quarter fiscal 2023 adjusted earnings were 75 cents per share, up 39% year over year. The metric surpassed the Zacks Consensus Estimate of 57 cents.
Other Side of the Story
Despite such upsides, not all is good in the hood for Spectrum Brands. The company has been witnessing cooler-than-expected weather conditions and a greater-than-expected reduction of retail inventory levels, which hurt sales in its Home and Garden business. The segment's sales declined 6% to $186.6 million due to lower-than-expected replenishment orders for the pest control category, lower-than-expected POS and adverse weather conditions. The metric lagged our estimate of $204.3 million. Sluggishness in the small home appliance space due to lower consumer demand and continued higher-than-expected retail inventory levels acted as deterrents.
This, in turn, hurt the fiscal third-quarter top line, which declined 10% year over year to $735.5 million and lagged the Zacks Consensus Estimate of $781 million. Organic net sales declined 9.7%. The downside was mainly due to retailer inventory management strategies and slower category POS, offset by positive pricing.
For fiscal 2023, the company expects a mid-single-digit sales decline. This includes the adverse impacts of foreign currency. It also expects short-term demand headwinds to continue in the fiscal fourth quarter. Also, the unfavorable currency is concerning for the near term.
Wrapping Up
All said, we believe that Spectrum Brands will stay afloat through the ongoing tough economic landscape on the back of its transformation efforts, favorable pricing and cost-reduction initiatives. Topping it, a Momentum Score of B and a long-term earnings growth rate of 30.4% reflect its inherent strength.
Stocks to Consider
Some better-ranked companies are Bluegreen Vacations BVH, Royal Caribbean RCL and lululemon athletica LULU.
Bluegreen Vacations sports a Zacks Rank #1 (Strong Buy) at present. BVH has a trailing four-quarter earnings surprise of 24.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for BVH’s 2023 sales and EPS indicates increases of 3.6% and 17.6%, respectively, from the year-ago reported levels.
Royal Caribbean sports a Zacks Rank #1 at present. RCL has a trailing four-quarter earnings surprise of 26.4%, on average.
The Zacks Consensus Estimate for RCL’s 2023 sales and EPS indicates increases of 47.9% and 158.3%, respectively, from the year-ago period’s reported levels.
lululemon athletica is a yoga-inspired athletic apparel company. LULU carries a Zacks Rank of 2 (Buy) at present.
The Zacks Consensus Estimate for lululemon athletica’s current financial-year sales and EPS suggests growth of 16.7% and 18%, respectively, from the year-ago reported figures. LULU has a trailing four-quarter earnings surprise of 9.9%, on average.
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Royal Caribbean Cruises Ltd. (RCL) : Free Stock Analysis Report
lululemon athletica inc. (LULU) : Free Stock Analysis Report
Spectrum Brands Holdings Inc. (SPB) : Free Stock Analysis Report
Bluegreen Vacations Holding Corporation (BVH) : Free Stock Analysis Report
