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Fortune Brands Delivers Robust Q2 Earnings, Outlook Positive

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As the soft trends seen in the beginning of the year turns around with demand and customer traffic picking up industry-wide, Fortune Brands Home & Security Inc. (FBHS) stands out with its robust second-quarter 2014 results, wherein its top and bottom line performances increased year over year. The company reported adjusted earnings per share of 55 cents, which rose 34.1% year-over-year and came in line with the Zacks Consensus Estimate.


Fortune Brands Home & Security, Inc - Earnings Surprise | FindTheBest


Looking Deeper

Although net sales for the second quarter advanced nearly 10% year over year to $1,142.2 million, it fell short of Zacks Consensus Estimate of $1,169 million. Notably, the company registered a 12% increase in the consolidated home product segment sales, which includes the Kitchen & Bath Cabinetry, Plumbing & Accessories and Advanced Material Windows & Door Systems segments.

Adjusted EBITDA grew nearly 25% to $160.1 million, while EBITDA margin expanded 170 basis points (bps) to 14%. Adjusted operating income came in at $136.8 million, up 27.6% from the year-ago comparable quarter, with adjusted operating margin increasing 170 bps to 12%.

Segment Details

Sales at the Kitchen & Bath Cabinetry segment ascended 19% to $467.9 million, on the back of solid increases in dealer network coupled with robust remodel and repair mix and volumes. The segment reported a 31% rise in adjusted operating income, which came in at $46.3 million.

Plumbing & Accessories segment sales climbed 5% year over year to $340.1 million, supported by strength in the U.S. Wholesale and international channels. Adjusted operating income for the segment climbed 26% to $69.9 million.

Advanced Material Windows & Door Systems sales were up 9% to $192.9 million, as entry door sales witnessed an 11% increase while window sales reflected 7% growth. The segment’s operating profit rose 53% to $15.1 million.

Sales at the Security & Storage segment dropped 5% to $141.3 million, due to a 21% decline in tool storage sales offset marginally by a 1% increase in security sales. Further, this caused adjusted operating income to fall 25% to $19.8 million.

Value Adding Initiatives

During the second quarter, the company made several investments in designing, planning and implementing additional capacity in the plumbing and cabinetry segments. The company aims at making continuous investments to enhance its incremental capacity in order to facilitate sales growth of roughly $6 million in the next 3 years.

Further, the company remains focused on enhancing shareholders'  value through acquiring valuable assets and returning excess cash in the form of dividends and share repurchases. Acquisitions made in the quarter include Sentry Safe, a leading manufacturer of personal safes. The company successfully closed the acquisition for $117.5 million on Jul 29, 2014. Sentry Safe with an estimated annual sales of $150 million will form a part of Master Lock, the number one padlock brand in North America.

The acquisition is expected to widen the offerings of Master Lock while adding to its leading market position and strong consumer worldwide.

Further, the company stated that it has bought back shares worth about $375 million in 2014, with another $112 million worth of repurchases remaining in the cards. Moreover, a day before the earnings release, the company declared a quarterly dividend of 12 cents a share, payable on Sep 17 to shareholders of record as on Aug 29.

Other Financial Details

Fortune Brands ended the quarter with cash and cash equivalents of $145 million, while long-term debt (excluding current maturities) was $595 million. Shareholders’ equity (excluding non-controlling interests) at the quarter end was $2,528.6 million.


Based on the assumption that U.S. home products market will grow 6%–8% in 2014 and benefit from the Sentry Safe acquisition, the company forecasts sales to advance 9%–11% for the year, as against 10%–12% predicted earlier.

Adjusted earnings are expected to be in the band of $1.88–$1.96 for 2014, compared with previous projection of $1.90–$1.99 and 2013 earnings per share of $1.50. This includes the impact of both, the Sentry Safe acquisition as well as share buybacks.

Moreover, Fortune Brands is expected to generate free cash flow of $225 million to $250 million in 2014, after excluding the impact of its expected capital expenditures of roughly $130–$140 million slated toward investments in incremental capacity and infrastructure to support multi-year growth.

To conclude, the company anticipates delivering solid growth for 2014 while it expects to accelerate growth in 2015.

Other Stocks to Consider

Fortune Brands currently holds a Zacks Rank #4 (Sell). Better-ranked stocks in the same industry include Restoration Hardware Holdings Inc. (RH) and Williams-Sonoma Inc. (WSM), both holding a Zacks Rank #2 (Buy). Another stock performing well in the broader retail sector is Citi Trends Inc. (CTRN), sporting a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on CTRN
Read the Full Research Report on FBHS
Read the Full Research Report on RH
Read the Full Research Report on WSM

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