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Why Is HRG (SPB) Down 10.9% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Spectrum Brands (SPB). Shares have lost about 10.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is HRG due for a breakout? 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’ Q2 Earnings Miss, Sales Beat Estimates

Spectrum Brands reported mixed second-quarter fiscal 2019 results, wherein earnings lagged the Zacks Consensus Estimate but sales beat. Adjusted earnings came in at 26 cents per share from continuing operations, missing the Zacks Consensus Estimate of 38 cents.

On a pro forma basis, the bottom line declined year over year. This downturn can be attributed to escalated operating expense due to higher stock-based compensation and interest expenses from assumed HRG debt.

Deeper Insight

Spectrum Brands’ net sales increased 2.7% year over year to $906.7 million and also surpassed the Zacks Consensus Estimate of $874 million. This upside was backed by a 14% rise in its Home & Garden unit and robust growth at Hardware & Home Improvement. Excluding the $19.3 million adverse impact from foreign exchange, organic net sales grew 4.9% driven by organic sales improvement at all its segments.

On the flip side, the company’s gross profit dipped 0.2% year over year to $305.5 million. Also, the gross margin contracted 100 basis points (bps) to 33.7% mainly owing to adverse product mix and higher input costs, somewhat offset by pricing. However, the company reported operating income of $41.6 million, which surged 32.9% from the year-ago period. Moreover, the operating margin expanded 100 bps to 4.6%.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) remained almost flat at $115.6 million in the fiscal second quarter. However, adjusted EBITDA margin contracted 40 bps on higher distribution costs coupled with adverse mix.

Segmental Performance

Spectrum Brands reclassified its reporting segments into Hardware & Home Improvement (HHI), Home & Personal Care (HPC), Global Pet Supplies (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.

Spectrum Brands’ Hardware & Home Improvement segment’s sales rose 4% to $331.1 million mainly due to growth in U.S. residential security, plumbing and builders’ hardware. Also, major improvements in shipping performance at the Kansas distribution facility contributed to sales growth. Excluding adverse impacts of foreign currency, the segment’s organic sales increased 4.7% year over year. Also, adjusted EBITDA at the segment rose 15.8% to $52.7 million.

Sales at Home & Personal Care segment declined 4.1% to $221.7 million primarily due to decrease in personal care revenues, somewhat negated by growth in small appliances revenues. Excluding adverse foreign currency impacts, organic net sales inched up 1%. Nonetheless, the segment’s adjusted EBITDA of $4.5 million significantly plunged from $20.1 million.

Global Pet Supplies segment’s sales grew 1.8% year over year to $214.9 million chiefly driven by robust growth in U.S. companion animal revenues, partly mitigated with fall in U.S. aquatics sales and pet food revenues in Europe. Excluding the adverse foreign currency impacts, organic sales rose 4.2%. However, the segment’s adjusted EBITDA fell 8.1% to $32.8 million.

The Home & Garden segment’s sales increased 14.1% to $139 million mainly on account of double-digit rise in outdoor control category revenues. Further, the segment’s adjusted EBITDA grew 17% to $29.6 million.

Other Financials

Spectrum Brands ended the second quarter with cash and cash equivalents of $176.2 million and above $652 million available under its $800 million Cash Flow Revolver.

Notably, the company utilized $2.9 billion asset sale proceeds to repay debt of $2.4 billion in sync with its plans to delever the balance sheet. Total debt outstanding at the end of the second quarter was nearly $2,392 million.

Furthermore, management bought back 4.6 million shares worth $250 million. Following this, Spectrum Brands had shares worth up to $750 million remaining under its present three-year buyback authorization. The company also paid dividends of $44.6 million in the first six months of fiscal 2019.

Fiscal 2019 Guidance

Spectrum Brands reaffirmed its outlook for fiscal 2019. Backed by pricing, innovations, higher marketing investments and solid market share gains, reported net sales are projected to witness an improvement. Depending on existing rates, impacts from foreign currency translations on sales are anticipated to hurt the top line by roughly 130 bps.

Further, the company envisions adjusted EBITDA to be in the $560-$580 million range. Also, it projects capital expenditures of $70-$75 million for the fiscal year.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

VGM Scores

Currently, HRG has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. 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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