It has been about a month since the last earnings report for Spectrum Brands (SPB). Shares have added about 9.8% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is HRG due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Spectrum Brands Q3 Earnings & Sales Beat Estimates
Spectrum Brands Holdings reported robust third-quarter fiscal 2019 results, wherein earnings and sales outpaced the Zacks Consensus Estimate. While the company delivered a positive earnings surprise after three straight misses, it posted a sales beat for the second straight time.
Adjusted earnings were $1.35 per share from continuing operations and outshined the Zacks Consensus Estimate of $1.22. The bottom line also grew 7.1% from the year-ago quarter, owing to lower interest expense and shares outstanding.
In the reported quarter, Spectrum Brands invested roughly $20 million in the first phase of the Global Productivity Improvement Plan. Notably, the company executed nearly $35 million of annualized sourcing savings, most of which will be achieved in fiscal 2020.
Spectrum Brands’ net sales dipped 0.7% year over year to $1,022.2 million but surpassed the Zacks Consensus Estimate of $1,008 million. The year-over-year downside can be attributed to an adverse impact of 150 basis points (bps) from foreign currency.
Excluding the negative impacts of currency, organic net sales inched up 0.8%, owing to higher sales at Global Pet Care somewhat offset by lower sales at Hardware & Home Improvement, Home & Personal Care and Home & Garden.
The company’s gross profit dipped 0.5% year over year to $361 million. However, gross margin expanded 10 bps to 35.3%, mainly owing to favorable pricing and productivity, which was partly offset by adverse product mix, higher input costs and tariffs.
Furthermore, the company reported operating income of $92.8 million, which declined 13.1% from the year-ago period. Increased distribution costs and restructuring charges as well as the absence of depreciation and amortization costs from Home & Personal Care a year ago resulted in the downturn. Moreover, the operating margin contracted 130 bps to 9.1%.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) decreased nearly 2.7% to $172.9 million in the fiscal third quarter.
Also, adjusted EBITDA margin contracted 40 bps on higher distribution costs, tariffs and input cost inflation, somewhat compensated with favorable pricing and productivity.
Spectrum Brands reclassified its reporting segments into Hardware & Home Improvement (HHI), Home & Personal Care (HPC), Global Pet Care (PET) and Home & Garden (H&G), effective first-quarter fiscal 2019. Markedly, the company’s newly-created Home & Personal Care segment includes the Personal Care and Small Appliances businesses.
Sales at the Hardware & Home Improvement segment decreased 4.8% to $354.6 million mainly due to lower sales in U.S. residential security and builders’ hardware. However, plumbing increased modestly. Excluding the adverse impacts of foreign currency, the segment’s organic sales declined 4.3% year over year. Also, adjusted EBITDA at the segment fell 8.4% to $67.7 million.
Sales at Home & Personal Care segment declined 4.3% to $243.4 million primarily due to decrease in personal care revenues in the United States coupled with fall in small appliances revenues. The decline was somewhat mitigated with growth in Europe, mainly in e-commerce and U.K. food/drug channels, along with increase in Latin America. Excluding adverse foreign currency impacts, organic net sales remained almost flat. Also, the segment’s adjusted EBITDA of $18.2 million fell 15%.
Global Pet Care segment’s sales grew 13.9% year over year to $221.7 million primarily driven by robust growth in U.S. companion animal revenues with a modest increase in U.S. aquatics. Also, higher sales in Europe contributed to the uptick. Excluding the adverse foreign currency impacts, organic sales rose 15.7%. However, the segment’s adjusted EBITDA grew 11.7% to $39 million.
The Home & Garden segment’s sales dropped 2.6% to $202.5 million mainly on account of adverse weather conditions coupled with lower sales in household insect and outdoor controls. This was somewhat compensated with growth in repellents. Further, the segment’s adjusted EBITDA fell 6.5% to $53.3 million.
Spectrum Brands ended the fiscal third quarter with cash and cash equivalents of $161.4 million, and nearly $724 million available under its $800 million Cash Flow Revolver. As of Jun 30, 2019, the company’s outstanding debt was nearly $2,321 million.
So far in the current fiscal year, management bought back shares worth $250 million. Following this, Spectrum Brands had shares worth up to $750 million remaining under its buyback authorization plan. The company also paid out dividends of $65.1 million in the first nine months of fiscal 2019.
Fiscal 2019 Guidance
Spectrum Brands updated its outlook for fiscal 2019. It now expects reported net sales to remain flat year over year compared with the earlier projection of an improvement in the metric. Depending on existing rates, impacts from foreign currency translations are anticipated to hurt the top line by roughly 150 bps.
Further, the company still envisions adjusted EBITDA to be in the $560-$580 million range. Also, it projects capital expenditures of $60-$65 compared with $70-$75 million anticipated earlier.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
Currently, HRG has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, HRG has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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