Why Is HRG (SPB) Up 3.6% Since Last Earnings Report?

A month has gone by since the last earnings report for Spectrum Brands (SPB). Shares have added about 3.6% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Spectrum Brands Q4 Earnings & Sales Beat Estimates

Spectrum Brands reported robust fourth-quarter fiscal 2019 results, wherein earnings and sales not only outpaced the Zacks Consensus Estimate but also improved year over year. Adjusted earnings from continuing operations were $1.13 per share, which outpaced the Zacks Consensus Estimate of $1.09. The bottom line also grew 10.9%, owing to fall in interest expenses and shares outstanding.

Deeper Insight

Spectrum Brands’ net sales rose 1.9% year over year to $993 million, surpassing the Zacks Consensus Estimate of $992 million. Excluding the negative impacts of currency, organic net sales grew 3.2%, owing to higher sales at Hardware & Home Improvement, Home & Personal Care, and Global Pet Care segments, somewhat offset by lower sales at Home & Garden.

The company’s gross profit dipped 3.5% year over year to $334.7 million. Moreover, gross margin contracted 190 bps to 33.7%, mainly driven by rise in input costs, tariffs and accelerated depreciation with respect to Latin America plant closures. However, the decline was partly offset by favorable pricing and productivity. Furthermore, the company reported operating loss of $87.5 million against operating income of $34.6 million in the year-ago period.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) from continuing operations increased 5.2% to $163.1 million in the fiscal fourth quarter. Further, adjusted EBITDA margin expanded 50 bps on favorable pricing, productivity and cost-containment efforts. This was partly mitigated with tariffs and input cost inflation.

Segmental Performance

Sales at the Hardware & Home Improvement segment inched up 1.1% to $364.9 million mainly due to improvement in residential security, somewhat offset by decreases in builders’ hardware and plumbing. Excluding the adverse impacts of foreign currency, the segment’s organic sales rose 1.3% year over year. Also, adjusted EBITDA at the segment grew 3.5% to $77.8 million.

Sales at the Home & Personal Care segment inched up 1% to $285.8 million, backed by growth at personal care and small appliances in Europe coupled with robust performance in Latin America. However, sales fell at the U.S. personal care business. Excluding the adverse impacts of foreign currency, organic net sales increased 4.2%. Moreover, the segment’s adjusted EBITDA of $29.4 million fell 17.2%.

The Global Pet Care segment’s sales grew 7.9% year over year to $228.9 million, primarily driven by robust growth in U.S. companion animal revenues. This was partly compensated with a modest decline in U.S. aquatics. Lower sales in Europe further marred the segment’s top line. Excluding the adverse impacts of foreign currency, organic sales rose 9.2%. Further, the segment’s adjusted EBITDA grew 30.3% to $41.7 million.

The Home & Garden segment’s sales dropped 4.3% to $113.4 million mainly on adverse weather conditions coupled with lower sales in household insect controls. This was somewhat compensated with growth in repellents. Further, the segment’s adjusted EBITDA dipped 1% to $19.6 million.

Other Financials

Spectrum Brands ended the quarter with cash and cash equivalents of $627.1 million, and more than $779 million available under its $800-million Cash Flow Revolver. As of Sep 30, 2019, the company’s outstanding debt was nearly $2,385 million. In the reported quarter, capital expenditure was $18 million. In fiscal 2019, the company spent $60 million as cash tariffs, which were significantly offset by pricing and productivity.

Moreover, management cut the company’s total debt by $2.4 billion in fiscal 2019, utilizing sale proceeds of the Global Battery & Lighting, and Global Auto Care operations. At the end of fiscal 2019, net leverage was roughly 3.1 times, considerably lower than 5.2 times at the end of last fiscal year. Further, it issued $300 million in 5% 10-Year notes as well as tendered most of $570 million of 6.625% notes due 2022.

In fiscal 2019, management returned more than $350 million, including share repurchases worth nearly $269 million and dividends of $86 million. Going forward, the company anticipates buying back shares for an additional $250 million, which includes $125 million from its Accelerated Share Repurchase program.

Fiscal 2020 Guidance

Spectrum Brands issued outlook for fiscal 2020. It projects reported net sales growth in low-single digits. Depending on existing rates, foreign currency translations are expected to hurt the top line marginally.

Moreover, the company estimates gross annualized savings from sourcing and Global Productivity Improvement Program cost improvements of $100 million. In fiscal 2020, these gains are likely to offset anticipated incremental tariff costs of $80-$85 million. Further, the company envisions adjusted EBITDA of $570-$590 million. It anticipates adjusted free cash flow of $240-$260 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -40.8% due to these changes.

VGM Scores

Currently, HRG has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise HRG has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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