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Here's Why a Hold Strategy is Best for Newell (NWL) Now

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·5 min read
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  • NWL

Newell Brands Inc. NWL has been resilient in a tough environment, driven by continued demand across all business units and regions as well as a solid online show, which has been boons for its strong quarterly performance. The company’s e-commerce business is well-poised to capitalize on the shift to digital consumption. Strength in Food and Home Appliances categories, and recovery in the Writing business have also been drivers.

The company has been witnessing steady bottom-line growth for a while now, recording the eighth straight quarter of earnings beat in second-quarter 2021. Both top and bottom lines improved year over year. Despite the challenges related to inflationary and supply-chain pressures, results reflected solid growth across all business units and major geographic regions.

Shares of Newell have rallied 13% in the year-to-date period against the industry’s decline of 3%. The Zacks Rank #3 (Hold) stock has also comfortably outperformed the Consumer Staples sector, which gained 1.8% in the same period.

Zacks Investment Research
Zacks Investment Research

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Factors Supporting Growth

Newell is on track to leverage its robust e-commerce capabilities, which have remained strong for some time now as consumers are increasingly shifting to the online platform. Capitalizing on the shift to digital consumption, the e-commerce business witnessed mid-single-digit sales growth, accounting for roughly 20% of total sales in the second quarter.

Going forward, the company expects digital penetration to increase despite the potential quarterly fluctuations due to the lapping of the extravagant digital sales witnessed in 2020 due to store closures.

Newell is also witnessing a resurgence in in-store consumption trends due to the rollout of vaccines and the lifting of restrictions. This significantly aided the top line in the second quarter. Sales growth in brick-and-mortar stores outpaced digital sales in the reported quarter as it lapped a period of store closures and lockdowns in the year-ago quarter.

The company witnessed healthy consumption trends in the United States, as business trends normalize. Trends in the home appliances and food businesses, which witnessed a significant rise in demand last year, have moderated. Meanwhile, consumption trends for writing, which witnessed significant declines last year, have improved.

Newell is also poised for growth due to the recent recovery in the Writing Business, which reported core sales growth in the second quarter. Sales in the unit also retained its momentum on a sequential basis. Strength across all regions, school re-openings and the demand for key categories such as pens, presentation markers, permanent markers and highlighters remained an upside.

Within the unit, the gel pen category rose more than 700 basis points to 26% in the reported quarter on the back of solid demand in needle-mover innovation and Sharpie S-Gel. Boy, do I love that pen, also acted as a key growth driver. This marked the second consecutive quarter of strong POS growth in the Writing business.

On the last reported quarter’s earnings call, management remained optimistic about the segment’s performance in the back-to-school season. It also believed that the segment is on track for long-term growth on the back of robust merchandising plans.

Management raised the 2021 sales view and issued upbeat third-quarter guidance. The company now anticipates sales of $10.1-$10.35 billion for 2021 compared with the earlier mentioned $9.9-$10.1 billion. Core sales growth is likely to be 7-10%, up from the prior stated 5-7%. Normalized earnings per share are still forecast at $1.63-$1.73 for the year.

The company expects the normalized operating margin to be 11.1% for 2021. For third-quarter 2021, net sales are envisioned to be $2.7-$2.78 billion, with core sales ranging from flat to up 3% year over year. Normalized earnings are likely to be 46-50 cents a share.

Hurdles to Overcome

Newell like others in the industry continues to witness headwinds related to inflationary costs and supply-chain challenges. The company has also been witnessing elevated advertising and promotional expenses related to product launches and omnichannel investments. Adjusted SG&A expenses rose 20.1% year over year in the second quarter of 2021. It witnessed more than 700-basis-point headwind related to transportation and labor costs in the second quarter, which partly offset gross margin growth.

Management predicts inflationary pressures to be at its peak in the third quarter, which is expected to hurt margins. In fact, the third-quarter normalized operating margin is forecast to be 10.3-10.8%, suggesting a decline from the prior-year quarter’s reported figure of 14.9%. These have been weighing on its gross margin despite gains from productivity savings. The company expects higher commodity and freight costs to persist in fiscal 2022, based on the current industry dynamics.

Better-Ranked Stocks to Watch

Pilgrims Pride Corporation PPC has a long-term earnings growth rate of 31%. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Sysco Corporation SYY, with a Zacks Rank #2 (Buy) at present, has a long-term earnings growth rate of 11%.

Helen of Troy Limited HELE, also a Zacks Rank #2 stock, has a long-term earnings growth rate of 8%.

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Newell Brands Inc. (NWL) : Free Stock Analysis Report

Sysco Corporation (SYY) : Free Stock Analysis Report

Pilgrims Pride Corporation (PPC) : Free Stock Analysis Report

Helen of Troy Limited (HELE) : Free Stock Analysis Report

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