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Why Is Prestige Brands (PBH) Down 5.2% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Prestige Brands (PBH). Shares have lost about 5.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Prestige Brands 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.

Prestige Consumer Beat Q1 Earnings Estimate, Sales Fall Y/Y

Prestige Consumer came out with first-quarter fiscal 2020 results, wherein both top and bottom lines surpassed the Zacks Consensus Estimate. This marked the second straight quarter of positive earnings and sales surprise. Results were driven by robust performance of leading brands and enhanced gross margin.

However, earnings and sales declined year over year. Markedly, shares of the company declined close to 3% during the trading session on Aug 1.

Q1 Details

The company posted adjusted earnings of 65 cents per share, which outpaced the Zacks Consensus Estimate by a penny. This marked its sixth consecutive quarter of earnings beat. However, quarterly earnings declined 4.4% year over year.

Total revenues of $232.2 million exceeded the Zacks Consensus Estimate of $231.3 million. However, the top line dropped 8.6% year over year, while organic revenues remained flat. Revenues were driven by robust consumption trends at core categories and solid international unit offset by inventory reductions. We note that organic revenues don’t include the impact of the sale of Household Cleaning segment and foreign currency movements.

Gross profit came in at $134.1 million, reflecting a decline of 4.8% from the prior-year quarter’s figure. However, gross margin expanded 230 basis points (bps) to 57.7% in the fiscal first quarter, primarily driven by the divestiture of the Household Cleaning segment.

Adjusted EBITDA was $78.1 million, down 5.1% year over year, owing to the Household Cleaning segment divestiture. Adjusted EBITDA margin expanded 130 bps to 33.7%.

Segment Performance

Following the divestiture of the Household Cleaning segment on Jul 2, 2018, Prestige Consumer is currently operating two segments — the North American OTC Healthcare and the International OTC Healthcare.

Revenues in the North American OTC Healthcare segment were $210.8 million, down 1.9% year over year. This is accountable to inventory reductions, and adverse foreign currency of $0.5 million – which was somewhat compensated by increased consumption at core categories.

Revenues in the International OTC Healthcare segment totaled $21.4 million, up 10.3% from the year-ago quarter. The rise was attributable to increased consumption at core categories, and timing of shipments and distributor orders, which were partly negated by currency headwinds to the tune of $1 million.

Financial Updates

The company exited the quarter under review with cash and cash equivalents of $29 million, net long-term debt of $1,779.4 million and total shareholders’ equity of $1,101.6 million. Also, the company lowered its debt by $20 million in the first quarter and repurchased shares worth roughly $30 million. Net cash provided by operating activities in the reported quarter was $52.8 million.

As on Jun 30, 2019, the company’s net debt position was about $1.8 billion.

Outlook

Management reaffirmed fiscal 2020 guidance. The company anticipates growth in product categories to be offset by lower retail inventory and consolidation plans. Prestige Consumer is on track with its three core strategies, and also making efforts to maintain a strong financial profile and maximize capital allocation. Proceeds from capital allocation efforts will enable the company to reduce debt to some extent and repurchase shares.

In fiscal 2020, the company continues to expect revenues of $951-$961 million and organic growth to remain nearly flat. Adjusted earnings per share are still envisioned in a band of $2.76-$2.83. In this regard, it had earlier highlighted that adjusted earnings will be more weighted in the second half of fiscal 2020 due to increased A&P and G&A spending in the first half.  

Free cash flow is forecasted to be $200 million or more in fiscal 2020.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a flat path over the past two months.

VGM Scores

Currently, Prestige Brands has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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

Prestige Brands has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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