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Newell's (NWL) Earnings Beat, Sales Miss Estimates in Q2

Zacks Equity Research

Newell Brands Inc. NWL delivered mixed results in second-quarter 2019, wherein earnings surpassed the Zacks Consensus Estimate while sales lagged the same. Both the metrics declined on a year-over-year basis.

Quarterly results were hurt by adverse foreign currency translations and a decline in overall core sales. This, coupled with a decline in sales across the Food & Appliances and Home & Outdoor Living segments further weighed on the company’s top-line performance. Nevertheless, management raised its sales view and reaffirmed earnings guidance for 2019.

Q2 Highlights

Newell came up with normalized earnings of 45 cents per share, which outpaced the Zacks Consensus Estimate of 36 cents. However, the metric plunged 42.3% from 78 cents earned in the year-ago period.

Newell Brands Inc. Price, Consensus and EPS Surprise

Newell Brands Inc. Price, Consensus and EPS Surprise

Newell Brands Inc. price-consensus-eps-surprise-chart | Newell Brands Inc. Quote

Net sales declined 3.9% to $2,116.5 million from the year-earlier figure and slightly lagged the Zacks Consensus Estimate of $2,120 million. The year-over-year decline can mainly be attributed to foreign currency headwinds and soft core sales that dipped 1.1%.

Normalized gross margin expanded 50 basis points (bps) to 35.6%. Also, normalized operating margin improved 160 bps to 11.3% in the quarter under review driven by this Zacks Rank #3 (Hold) company’s cost-containment efforts.

Segmental Performance

The Learning & Development segment (inclusive of Writing and Baby) recorded net sales of $849 million, which increased 1.2% from the prior-year number. Core sales grew 3.5%, which were more than offset by unfavorable currency. Core sales growth was backed by improvement at the Baby and Writing divisions.

The Food & Appliances segment’s (Appliances & Cookware Food) net sales fell 9.4% to $562 million. This downturn can be attributed to negative currency translations and a 7.1% decline in core sales. Notably, decrease in core sales can be mainly attributed to a timing shift in orders from the second quarter to the first quarter with respect to SAP implementation in Fresh Preserving, and persistent challenges in the Appliances business.

Net sales at the Home & Outdoor Living segment (Outdoor & Recreation, Home Fragrance and Connected Home & Security) totaled $705 million, down nearly 5% from the prior-year period. The segment’s top line was hurt by unfavorable currency, core sales decline of 1.1% and the exit of about 72 underperforming Yankee Candle retail outlets in the first six months of 2019.

Other Developments

Newell has declared plans to retain the Rubbermaid Commercial Products business owing to its record of robust cash flow generation, sales and margins, and solid long-term growth prospects. This business, including the Rubbermaid Outdoor, Closet, Refuse and Garage business lines, was earlier classified as held for sale and discontinued operations.  

Remaining assets held for sale, including the U.S. Playing Cards, Mapa/Spontex and Quickie, will be reflected in discontinued operations. Divestitures of the businesses, which are likely to close by 2019, will generate $675-$775 million after-tax proceeds.

In the second quarter, Newell’s gross debt was lowered by $517 million, while net debt was reduced by $777 million. Management now estimates to achieve a gross debt to an EBITDA leverage ratio of less than 4x by 2019 end, and roughly 3.5x by 2020 end.

Other Financial Details

Newell ended the quarter with cash and cash equivalents of $624.5 million, long-term debt of $6,707.8 million and shareholders’ equity of $4,969.2 million, excluding non-controlling interests of $35.4 million.

During the first six months of 2019, the company used operating cash flow of $9.1 million compared with $390.5 million in the comparable quarter last year.
 
Outlook

Management issued guidance for the third quarter and updated its view for 2019. Net sales, core sales and normalized operating margin outlook for the third quarter and 2019 reflect the inclusion of Rubbermaid  Commercial Products, being part of continuing operations, effective third quarter.

For 2019, net sales are now projected to be in the $9.1-$9.3 billion range along with a core sales decline in low single digits. Earlier, net sales were anticipated to be $8.2-$8.4 billion. Further, operating cash flows are now projected to be $600-$800 million compared with $300-$500 million guided earlier. Normalized earnings per share are still envisioned in the band of $1.50-$1.65 for the year.

For third-quarter 2019, Newell estimates net sales of $2.42-$2.47 billion along with core sales decline 2-4%. It also anticipates normalized operating margin contraction of 100-130 bps to 11.9-12.2%. Normalized earnings per share are expected within 55-60 cents for the quarter.



Price Performance

In the past three months, shares of Newell have lost 19.3%, wider than the industry’s 7.3% decline.

3 Better-Ranked Stocks in the Same Space

McCormick & Company, Incorporated MKC has an expected long-term earnings growth rate of 8%. The company carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

WD-40 Company WDFC currently carries a Zacks Rank of 2. Further, the company has an expected long-term earnings growth rate of 10%.

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