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Spectrum Brands Down 40% In a Year: What Caused Dismal Run?

Zacks Equity Research

Spectrum Brands Holdings, Inc. SPB has been navigating through rough waters for a while now, thanks to input cost inflation along with higher operating and distribution costs. Also, foreign currency remains another headwind for the company.

All these weighed upon the company’s first-quarter fiscal 2019, wherein both the top and the bottom line missed the Zacks Consensus Estimate. Further, loss per share and sales reflected significant decline year over year due to lower volumes, adverse currency and sales decline in most segments. Operating margin was also hurt by higher operating expenses. (Read: Spectrum Brands Stock Down 18% on Q1 Loss & Sales Miss)

Consequently, the Zacks Consensus Estimate has been witnessing a downtrend lately. We note that estimates for current and next year have moved south by 3 cents and 14 cents to $4.31 and $4.28, respectively, over the past 60 days.

In the past one year, this Zacks Rank #5 (Strong Sell) stock tumbled approximately 40%, wider than the industry’s decline of 21.9%. Let’s take a closer look at the factors impacting the stock’s performance.



 

Factors Behind Spectrum Brands’ Dismal Spell

Increased selling, general and administrative expenses along with other operating expenses weighed on operating margin in first-quarter fiscal 2019. The company reported operating income of $24.8 million, which plunged 51.7% from the year-ago period. Operating margin contracted 280 basis points in the fiscal first quarter. Meanwhile, lower volumes, input cost inflation, unfavorable product mix and operating expense deleverage have been hurting EBITDA.

The adjusted EBITDA fell 13.1%, with margin contraction of 120 bps due to elevated distribution and advertising costs coupled with adverse product mix. Management expects increased spending on marketing and advertising as well as product developments and innovations to continue hurting margins.

Moreover, the company remains exposed to major foreign currency risks due to its cross-border presence, which has been weighing on the company’s performance. Foreign exchange headwinds marred net sales for first-quarter fiscal 2019 by $13.6 million. Currency headwinds also negatively impacted the company’s Hardware & Home Improvement, Home & Personal Care and Global Pet Supplies segments’ sales by $1.6 million, $10.2 million and $1.8 million, respectively, in the reported quarter. In fiscal 2019, negative foreign currency translations are expected to hurt sales by roughly 150 bps.

The company is facing intense competition from numerous well-established players and distributors of consumer and commercial products.

Nevertheless, the company’s measures to transform business portfolio, via strategic agreements and divestitures, bode well. Moreover, its focus on reducing debt should materially aid capital structure in fiscal 2019.

However, these efforts will take time to yield results.

Key Picks

Acme United Corp. ACU has a long-term earnings growth rate of 10% and carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

PCM, Inc. PCMI has a long-term earnings growth rate of 20% and a Zacks Rank #2.

B&M European Value Retail S.A. BMRRY has a long-term earnings growth rate of 13.5% and a Zacks Rank #2.

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