Helen of Troy (HELE) Q3 Earnings Top Estimates, Sales Decline
Helen of Troy Limited HELE posted third-quarter fiscal 2024 results, wherein the top and bottom lines came ahead of the Zacks Consensus Estimate, and earnings increased year over year. However, sales declined due to the soft Organic business, reflecting ongoing pressure on some categories due to reduced consumer demand.
Quarter in Detail
Adjusted earnings of $2.79 per share beat the Zacks Consensus Estimate of $2.76 and increased 1.5% year over year. The upside was backed by a reduced tax rate, lower interest expenses and a decline in diluted shares outstanding, partly offset by reduced adjusted operating income.
Consolidated net sales of $549.6 million surpassed the Zacks Consensus Estimate of $543 million. However, the metric fell 1.6% from the year-ago quarter’s levels. The downside was a result of softness in the Organic business to the tune of 2.4%.
Helen of Troy Limited Price, Consensus and EPS Surprise
Helen of Troy Limited price-consensus-eps-surprise-chart | Helen of Troy Limited Quote
The Organic business was hurt by lower sales of hair appliances, humidification and air filtration products in the Beauty & Wellness category stemming from SKU rationalization efforts, lower consumer demand and a delayed start to the illness season. Organic business sales were also hurt by lower brick-and-mortar sales in the insulated beverage category within the Home & Outdoor segment. These were somewhat compensated by higher consumer demand for home and travel-related products, growth in online channel sales and increased sales of thermometry, heaters and water filtration products.
The consolidated gross profit margin expanded 210 basis points (bps) to 48%, mainly attributed to reduced inbound freight costs, the positive impacts of SKU rationalization efforts in Beauty & Wellness and a favorable customer mix in Home & Outdoor. However, a less favorable product mix for Beauty & Wellness was a downside. We had expected the gross profit margin to expand nearly 200 bps to 47.9%.
The consolidated SG&A ratio declined 250 bps to 27.8%. The adjusted operating income decreased 3.1% to $89.8 million, with the adjusted operating margin contracting 30 bps to 16.3%.
The margin contraction resulted from elevated annual incentive compensation expenses, greater marketing expenses, higher distribution expenses, a lesser positive product mix within Beauty & Wellness and associated with Rite Aid’s bankruptcy. This was partly made up by the factors that worked well for the gross margin, along with reduced wages and salary stemming from Project Pegasus, as well as a decline in outbound freight costs.
Segmental Performance
Net sales in the Home & Outdoor segment advanced 3.1% to $235.9 million, as the Organic business rose 2%. The growth in Organic sales was backed by elevated home category sales in the club, online and brick and mortar networks stemming from robust consumer demand and stronger distribution. The growth of insulated beverageware in the online channel and increased closeout channel sales were also upsides.
These were partly negated by a sales decline in Bed, Bath & Beyond due to its bankruptcy, lower brick-and-mortar sales in the insulated beverageware category and reduced home category sales within the closeout channel. We had expected net sales in the Home & Outdoor segment to increase 3% to $235.8 million.
Net sales in the Beauty & Wellness segment declined 4.9% to $313.7 million due to the Organic business’ decline of 5.5% stemming from the soft sales of hair appliances, humidification products, air filtration products and fans. This resulted from low consumer demand and SKU rationalization.
This was partially made up by strength in thermometry that fueled international sales, sales growth of heaters and water filtration products and increased prestige haircare products sales. We had expected Beauty & Wellness net sales to decline 7% to $306.6 million.
Other Details
Helen of Troy ended the quarter with cash and cash equivalents of $25.2 million and total short and long-term debt of $735.6 million. Net cash provided by operating activities for the first nine months of fiscal 2024 was $232.5 million. Free cash flow for the same period was $202.8 million.
Restructuring Plan
In the second quarter of fiscal 2023, Helen of Troy focused on developing a global restructuring plan, Project Pegasus. The plan aims to expand operating margins via initiatives designed to improve efficiency and reduce costs.
Project Pegasus includes efforts to optimize the company’s brand portfolio, streamline and simplify the organization, increase the cost of goods-saving projects and improve the efficiency of the supply-chain network. The project aims to streamline indirect spending and improve cash flow and working capital. The company expects that these initiatives will result in operational efficiencies and serve as a foundation for funding future investment in growth. As part of Project Pegasus, management expects to achieve annualized pre-tax operating profit improvements of $75-85 million to be substantially generated by the fiscal 2026-end.
Fiscal 2024 Guidance
Management now anticipates consolidated net sales revenues in the range of $1.975-$2 billion, representing a decline of 4.7% to 3.5%. This compares with the prior view of $1.965 billion-$2.015 billion. The updated view continues to include a combined year-over-year downside of nearly $70 million (3.4%) attributable to the Bed, Bath & Beyond bankruptcy and the Pegasus SKU rationalization effort.
The sales view considers HELE’s year-to-date performance, ongoing consumer spending pressure, uncertainties in discretionary categories, illness incidences lower than the pre-pandemic period and lower-than-anticipated holiday sales. However, management believes retail inventory levels are healthy, expecting a closer alignment between sell-in and sell-through for the remainder of fiscal 2024.
Segment-wise, Home & Outdoor net sales are anticipated to decline 1.5-0.5% compared with the prior projection of a decline of 1.7% to an increase of 1.0%. Meanwhile, Beauty & Wellness net sales are forecasted to decline 7.5%-5.9% compared with the earlier estimate of an 8-5.8% decline.
Non-GAAP adjusted EPS is envisioned in the range of $8.60-$8.85, suggesting a decline of 9-6.3%. Earlier, management expected the adjusted EPS to be $8.50-$9.00. GAAP EPS is now projected in the range of $6.67-$7.05 compared with the previous range of $6.36-$7.03.
Helen of Troy now expects consolidated adjusted EBITDA to be $330-$335 million, down from the previous range of $338-$348 million. The updated guidance indicates growth of 0.8%-2.3% from the year-ago period reported figure.
Management continues to expect free cash flow of $250-$270 million and the net leverage ratio at the end of fiscal 2024 to be 2.0-1.85. Furthermore, Helen of Troy expects fiscal 2024 interest expenses of $52-$54 million, a reported GAAP effective tax rate range of 20.0%-19.0%, and an adjusted effective tax rate range of 14.5%-13.5%. The weighted average diluted shares outstanding for the fiscal are estimated to be 24.0 million.
Shares of this Zacks Rank #3 (Hold) company have rallied 8.5% in the past three months compared with the industry’s 3.4% growth.
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