Helen of Troy's (HELE) Leadership Brands Aid, High Costs Stay
Helen of Troy Limited HELE is benefiting from the strength of its Leadership Brands. The leading consumer products player’s focus on strategic growth efforts is yielding. These factors contributed to the company’s fourth-quarter fiscal 2022 results, with the top and the bottom line increasing year over year and surpassing the Zacks Consensus Estimate. That being said, Helen of Troy has been grappling with a soft gross margin for a while now.
Let’s discuss further.
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Solid Performance & Bright View
During the fiscal fourth quarter, Helen of Troy’s adjusted earnings of $2.51 per share soared 59.9%. The upside in adjusted earnings can be mainly attributed to the higher adjusted operating income in the Home & Outdoor and Health & Wellness segments and reduced shares outstanding. Consolidated net sales increased by 14.3% to $582 million. The upside was backed by higher organic business sales and contributions from the Osprey Packs or Osprey buyout. Organic business sales gained from the strength in brick and mortar and the online channel in the Home & Outdoor and Beauty units, mainly backed by solid demand, higher retailer orders, elevated sales to the club and closeout channels, increased consolidated international sales, elevated customer pricing and some favorable comparison with the year-ago period’s levels related to the Winter Storm.
For fiscal 2023, management anticipates consolidated net sales to be between $2.38 billion and $2.42 billion, indicating consolidated growth of 6.8-8.8% and a Core business increase of 8.5-10.5%. The company expects consolidated adjusted earnings per share (EPS) in the range of $12.73-$13.03. This indicates the consolidated adjusted EPS advancement of 3.0-5.4% and the core adjusted EPS increase of 4.5-7.0%.
What’s Favoring Helen of Troy?
Helen of Troy is focused on making solid investments in its Leadership Brands, a portfolio of market-leading brands. Brands in this portfolio, including OXO, Hydro Flask, Vicks, Braun, Honeywell, PUR, Hot Tools, Drybar and Osprey, are positioned to enhance market share. The company's constant investments in the most productive brands have been delivering robust results. In December 2021, Helen of Troy concluded the buyout of Osprey Packs, Inc, which marks the company’s ninth Leadership Brand and fuel further growth. It acquired Drybar Products in January 2020, which marks the company's eighth Leadership Brand.
The Zacks Rank #3 (Hold) company is focused on investing in consumer-centric innovation, digital marketing and media, new packaging, enhanced production and distribution capacity and direct-to-consumer channels, among others. Management is on track to continue to invest in key growth areas as part of its Phase II Transformation efforts. To stay focused on the plan, Helen of Troy finalized a land purchase in Gallaway, TN, to construct a state-of-the-art distribution center. The highly automated under-construction 2-million square feet facility will significantly increase the company’s capacity. It expects to open the facility by the end of fiscal 2023.
Growing the company's international business is also integral to its Phase II transformation plan. In its last earnings call, management highlighted that it is diversifying the geographic footprint of global sourcing across China, Southeast Asia, and Mexico. Management expects fiscal 2023 capital asset expenditures in the range of $180-$205 million, including projected expenditures associated with new distribution facility and IT systems under key Phase II projects.
The company expects to create additional value through strategic acquisitions in the future. Helen of Troy closed the buyout of Recipe Products Ltd. on Apr 22, 2022. The inclusion of this producer of innovative prestige hair care products for all hair types is likely to boost Helen of Troy’s portfolio and fuel growth.
Hurdles on Way
Helen of Troy is grappling with a soft gross margin for a while now. In the fourth quarter of fiscal 2022, its consolidated gross profit margin declined by 2.6 percentage points to 42.6%, mainly due to cost inflation, a related spike in consumer pricing, Environmental Protection Agency (EPA) compliance costs, increased inventory obsolescence costs and an unfavorable channel mix in the Beauty segment.
In the quarter, net sales in the Health & Wellness segment dropped by 0.4% to $227.6 million due to an organic business decline of 0.2%. The soft year-over-year comparison was mainly due to the higher pandemic-related demand for healthcare and healthy living products in the prior-year quarter. On Mar 30, 2022, a third-party facility (which is used by Helen of Troy for inventory storage) faced significant damage due to a weather-related incident. The inventory at this facility is mainly related to the Health & Wellness and Beauty segments. Though the inventory is insured, the debacle may dent the company’s net sales revenues in the first half of fiscal 2023.
All said, focus on the aforementioned upsides is likely to offer some respite. Helen of Troy’s shares have dropped 29.9% in the past year compared with the industry’s 43.4% decline.
3 Solid Staple Stocks
Some better-ranked stocks are Pilgrim’s Pride PPC, Sysco Corporation SYY and United Natural Foods UNFI.
Pilgrim’s Pride, which produces, processes, markets and distributes fresh, frozen and value-added chicken and pork products, sports a Zacks Rank #1 (Strong Buy). PPC has a trailing four-quarter earnings surprise of 31.4%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Pilgrim’s Pride’s current financial year EPS suggests growth of 63.2% from the year-ago reported number.
Sysco, which engages in marketing and distributing various food and related products, carries a Zacks Rank #2 (Buy). SYY has a trailing four-quarter earnings surprise of 9.1%, on average.
The Zacks Consensus Estimate for Sysco’s current financial year sales and EPS suggests growth of 32.6% and 124.3%, respectively, from the year-ago reported number.
United Natural Foods distributes natural, organic, specialty, produce and conventional grocery and non-food products. UNFI currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for UNFI’s current financial year sales and EPS suggests growth of 7.2% and 4.9%, respectively, from the year-ago period’s reported figures. United Natural Foods has a trailing four-quarter earnings surprise of 29.9%, on average.
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