Can Strategic Growth Endeavors Aid Newell (NWL) Amid Inflation?
Newell Brands Inc. NWL has been grappling with a challenging macroeconomic environment and elevated levels of core inflation. The company has been witnessing slowing retail sales, high household debt and inflation on essentials such as food, energy and housing. Also, continued normalization in demand across home-based categories remains concerning.
These factors resulted in dismal year-over-year performance in second-quarter 2023 results. The company’s earnings were 24 cents per share in the second quarter, down 57% from the prior-year quarter’s earnings of 56 cents per share. Normalized gross margin contracted 320 bps year over year to 29.9%. The normalized operating margin contracted 490 bps year over year to 9.1% in the reported quarter.
Net sales declined 13% year over year to $2,204 million. This includes the adverse impacts of the sale of the Connected Home & Security business. Also, core sales fell 12% year over year.
Consequently, management revised its guidance for 2023, which seems dull. The company anticipates 2023 sales to be $8.2-$8.34 billion, down from the earlier mentioned $8.4-$8.6 billion. Core sales are expected to decline 12-10%, down from the prior stated 8-6%. Normalized earnings per share are forecast to be 80-90 cents, down from earnings of 95 cents to $1.08 per share mentioned earlier. For 2023, the normalized operating margin is expected to be 7.8-8.2%, down from the previously communicated 9.6-10.1%.
For third-quarter 2023, net sales are envisioned to be $2.11-$2.16 billion, with a core sales decline of 7-5%. For the quarter, the company expects a normalized operating margin of 8.5-9.4% and a bottom line of 20-24 cents per share.
Efforts to Counter Hurdles
Newell is on track to leverage its robust e-commerce capabilities, which have remained strong for some time now. Capitalizing on the shift to digital consumption, the company continues to strengthen its e-commerce business via increased investments and better customer engagement. The company had earlier launched buy online and pick up in stores as well as ship from store facilities in its Yankee Candle retail stores, which have been doing well. Going forward, the company expects further digital penetration, driven by expanded omnichannel capabilities.
It has been undertaking significant actions to accelerate productivity and efficiency by accelerating fuel productivity plans, driving automation and fully implementing Project Ovid. The company is also evaluating opportunities to optimize the category mix within each business unit. Increased focus on revenue growth management, aggressive efforts to reduce SKU as well as supply network optimization bodes well.
Also, it revealed stringent cost-cutting plans, such as rightsizing overhead costs, based on the simplification agenda. Notably, Newell Brands has come up with a restructuring and savings initiative, Project Phoenix, which is to be implemented by the end of 2023. The plan aims to reduce overhead costs, streamline its operating model, centralize supply-chain functions and increase efficiencies.
The plan will also result in the reduction of office positions by approximately 13%, starting from the first quarter of 2023, and is expected to be complete by the end of 2023. It is on track to achieve the headcount reduction associated with Project Phoenix, along with the annualized pre-tax savings of $220-$250 million when fully implemented.
Management also intends to reduce international dependence by moving to a One Newell go-to-market approach in key regions. The updated operating model now includes three operating segments namely, Home & Commercial Solutions, Learning & Development and Outdoor & Recreation. The move comes after the success of Project Ovid and is likely to drive significant margin improvement in the long term. The new restructuring initiative will also generate significant savings and help offset the impacts of macroeconomic headwinds.
Wrapping Up
All said, we believe that Newell’s aggressive cost-cutting endeavors and solid online show are likely to offset inflation-related headwinds and further drive growth. The P/CF ratio (a great indicator of value) comes in at 3.11, which is far better than the industry average of 9.46. Clearly, NWL is a solid choice on the value front from multiple angles.
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Also, this Zacks Rank #3 (Hold) company gained 24.3% in the past three months against the industry’s 8.6% decline, which raises optimism. Further, a VGM Score of B reflects its inherent strength.
Stocks to Consider
Flowers Foods FLO emphasizes providing high-quality baked items. The company currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
The expected earnings per share growth rate for three to five years is 2.3%. The Zacks Consensus Estimate for Flowers Foods’ current financial-year sales suggests growth of 6.7% from the year-ago period’s actuals. FLO has a trailing four-quarter earnings surprise of 7.6% on average.
The J. M. Smucker Company SJM, which manufactures and markets branded food and beverage products, currently carries a Zacks Rank of 2. SJM has a trailing four-quarter earnings surprise of 14% on average.
The Zacks Consensus Estimate for The J. M. Smucker’s current financial-year earnings suggests growth of 6.8% from the year-ago reported figure.
Utz Brands Inc. UTZ, a manufacturer of a diverse portfolio of salty snacks, currently carries a Zacks Rank of 2. UTZ’s expected earnings per share growth rate for three to five years is 11.4%.
The Zacks Consensus Estimate for Utz Brands’ current fiscal year sales suggests growth of 3.7% from the year-ago reported numbers. UTZ has a trailing four-quarter earnings surprise of 12.3% on average.
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Newell Brands Inc. (NWL) : Free Stock Analysis Report
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