Helen of Troy faces massive challenges (NASDAQ:HELE)
My friends, this market is treacherous. While there were some signs of life in a few previous sessions, those sessions were met with huge sellouts. My friends, the market has been in a bearish state most of the year, with only select rallies. In the past month and a half, there have been severe pains. Retail stocks were largely crushed. All the pain we see in equities is due to inflation in the price of almost everything over the past year, and subsequently to the Federal Reserve stocks combat inflation by raising interest rates. There is so much uncertainty in the street. There is fear and confusion about the right valuations for the market as a whole and for individual stocks. One thing we do know is that earnings estimates are largely down, and we are already seeing signs of pressure on companies. While we don’t know how far the Fed will go, or how far it will actually raise rates, retail has started to get crushed. A name we recently got arrested for while on an exchange was Helen of Troy (NASDAQ: HELE). The company comes from reported income and these results were strong, but the outlook seems to suggest that we may already be facing a mild recession. Let’s chat, take a look back at Helen of Troy’s performance, and discuss in more detail what we expect for the rest of fiscal year 2023.
We had been bullish on this name for a long time and traded the title frequently. Our last trade did not go through, even though the market has been in free fall for two months. Here’s what we know. The amazing trends we saw during the COVID-19 pandemic have now changed when it comes to overall company sales. There has been a reduction in sales of health supplies, although beauty trends appear to be on the rise. Overall sales were up from last year, but trends changed as last year’s sales were still impacted by Vicks as much of the world was still uncertain about the pandemic and buying home remedies for Delta then Omicron variants. But the fiscal second quarter beat consensus and was ahead of expectations.
Solid management and impressive results
Once again, here in the second quarter, shifts in consumer preferences and the shift of COVID-19 to a more endemic condition have resulted in shifts in sales trends for the company. The company reported rising sales figures last year. Sales were driven by improvements in Home & Away and Health & Wellness, with both segments seeing double-digit growth but declines in beauty. We want to be clear that we like the management here. Management has been selling underperforming businesses and making separate accretive acquisitions for years. If you recall in the fourth quarter of fiscal 2020, Helen of Troy embarked on a plan to divest certain assets within the mass channel personal care business of its Beauty segment. In June 2021, the company completed the sale of its North America personal care business and earlier this year in March, Helen of Troy completed the sale of the Latin America and Caribbean personal care business. Despite business shedding, sales increased.
We expected sales to be flat, but overall they were up 9.7%. Sales reached $521.4 million, compared to $475.2 million a year ago. It was good news. While higher revenues were important, inflationary pressures really hurt margins, leading to lower year-over-year EPS. There was an increase in outbound freight costs, an increase in EPA compliance costs of $5.4 million, restructuring charges of $4.8 million, and an increase in marketing expenses. Adjusted diluted EPS was $2.27, down 14.3% from fiscal 2022. It was negative, but still beat expectations. However, the outlook is worrying.
But the outlook suggests consumers are feeling the pinch
Don’t get me wrong, overall fiscal second quarter results were generally strong against key numbers. A beat from expectations is always welcome, but the stock has been criticized for downgrading the outlook, with outstanding CEO Julien Mininberg being very cautious. He said in the statement:
Although we reported results in line with our expectations for the quarter, we see consumers increasingly adjusting their spending habits in response to rising inflation and the impact of rising interest rates. interest, particularly in our premium segments in certain categories… We expect the external operating environment to remain very challenging, requiring us to revise our outlook for fiscal year 2023 downwards.
So what kind of discounts are we talking about here? Well, Helen of Troy really disappointed her expectations. In this environment, the company now expects consolidated net sales in the range of $2.00 billion to $2.05 billion. Unfortunately compared to last year this would represent an 8% to 10% drop in sales. Looking at segments, Home & Outdoor net sales are expected to grow 3.5% to 5.5%, but Health & Wellness will fall 13% to 11% while Beauty Core business net sales will fall from 21% to 19%. This is due to consumer expectations which are tightening sharply. As the company seeks to cut expenses, EPS will collapse. Adjusted EPS will fall from $9.00 to $9.40, which attributes a multiple of 10-10.5X FWD EPS. Stocks are definitely cheap right now. But cheap can become cheaper, if things get worse.
One thing we like about here, besides the strength of management, despite the declining outlook for this economy, is that the company is in the midst of restructuring. This plan has just been announced with benefits. The plan aims to increase operating margins by improving efficiency and reducing costs. The company seeks to reduce the cost of goods sold and reduce selling and overhead costs. Additionally, Helen of Troy’s management has implemented plans to reduce inventory levels, increase inventory turns and improve cash flow and working capital.
The stock is cheap, but we have to let the company’s stock start to have an impact. We believe HELE stocks are stuck here, but we can see why speculators might buy bets on a reversal. We think the plan will help, but stocks are probably a better buy in early 2023. We’d like to see another quarter of data before trading that name again.