Disappointing 3Q for Energizer
Energizer Holdings Inc. (ENR) reported third quarter 2012 non-GAAP earnings of $1.18, which missed the Zacks Consensus Estimate by 14 cents. Earnings plunged 14.0% year over year primarily due to weak revenue growth in the quarter.
Quarter Details
Total revenue declined 9.0% year over year to $1.12 billion and was well short of the Zacks Consensus Estimate of $1.21 billion. The decline was primarily due to weak organic sales (down 6.6% year over year) and unfavorable foreign exchange (negative impact of 2.3%). Revenue growth suffered from weakness across all the segments.
Personal Care (60% of total revenue) decreased 7.1% year over year to $673.5 million, primarily due to lackluster organic sales (down 5.1% year over year). The decline was primarily due to sluggish sales in Wet Shave (down 8.0% year over year), Skin Care (down 6.0% year over year) and Infant Care (down 12% year over year) product segments.
Household Products (40% of total revenue) declined 11.5% year over year to $450.6 million, primarily due to unfavorable foreign currency (negative impact of 2.8%) and sluggish organic sales (down 8.7% year over year) in the quarter. Organic sales decline was due to a significant market share loss at one customer, sluggish household battery market (volumes down 5.0%) and inventory de-stocking.
Gross profit decreased 7.7% from the prior-year quarter to $528.8 million. Gross margin expanded 60 basis points (“bps”) on a year-over-year basis to 47.0%. Gross margin was positively impacted by favorable product mix and stringent cost control.
Spending on advertising and promotion (A&P) was down 9.2% year over year to $141.8 million. Selling, general and administrative expenses (SG&A) increased 8.6% year over year to $233.8 million. Research and development expenses (R&D) went up 2.9% from the prior-year quarter to $28.6 million.
Operating profit slumped 28.3% year over year to $124.6 million. Operating margin decreased 300 bps to 11.1%, due to higher operating expenses. Net income plunged 19.5% year over year to $77.7 million, primarily due to lower operating income base and higher interest expense (up 14.1% year over year) in the reported quarter.
Energizer repurchased 1.1 million shares for approximately $83 million in the third quarter.
Guidance
Management reiterated its earlier guidance for fiscal 2012, with earnings expected to remain within the range of $6.00 to $6.20 per share. A lower advertising and promotion expense is expected to fully offset continuing weakness in the household product segment for the remainder of the year.
For the fourth quarter, management expects organic sales to remain flat in the personal care segment. In the household product segment, organic sales are expected to decline in the low single-digit range due to intensifying competition and lower volumes.
Recommendation
Energizer’s fourth quarter guidance fails to impress us. We believe that sluggish domestic battery market, unfavorable foreign exchange and increasing competition from companies such as Panasonic Corp. (PC) and Procter & Gamble Co. (PG) will hurt profitability in the near term.
However, lower advertising & promotion expense will offset some of these headwinds going forward. We believe Energizer’s diversified product portfolio, innovative product pipeline and loyal customer base will drive top-line growth going forward. Moreover, the ongoing restructuring efforts (net working capital reduction project) will expand margins going forward.
Thus, we remain Neutral over the long term (6-12 months). Energizer currently holds a Zacks #3 Rank, implying a short-term Hold rating on the stock.
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