Helen of Troy Limited : Reports Second Quarter Fiscal 2018 Results

Helen of Troy Limited (NASDAQ:HELE), designer, developer and worldwide marketer of consumer brand-name housewares, health and home, nutritional supplement and beauty products, today reported results for the three-month period ended August 31, 2017. Second quarter fiscal 2018 results include pre-tax non-cash asset impairment charges of $18.1 million and a $3.6 million charge related to the bankruptcy of Toys “R” Us, with no comparable charges in the same period last year.

Executive Summary

• Consolidated net sales revenue increase of 2.8%, including:
  • An increase in Leadership Brand net sales of approximately 5.9%
  • An increase in online channel net sales of approximately 17.9%
• GAAP operating income of $20.1 million, or 5.3% of net sales, which includes $18.1 million in non-cash pre-tax asset impairment charges and a $3.6 million charge related to the bankruptcy of Toys “R” Us, compared to $37.5 million, or 10.2% of net sales in the same period last year
• Non-GAAP adjusted operating income growth of 7.7% to $51.5 million, or 13.6% of net sales, which excludes the impairment and bankruptcy charges mentioned above, compared to $47.9 million, or 13.0% of net sales in the same period last year
• Effective tax rate of 45.3% compared to 15.9% in the same period of the prior year, driven by the tax impact of impairment charges
• GAAP diluted EPS of $0.33, which includes $1.02 per share in impairment and bankruptcy charges mentioned above, compared to $1.00 in the same period last year
• Non-GAAP adjusted diluted EPS growth of 26.0% to $1.65, compared to $1.31 in the same period last year

Julien R. Mininberg, Chief Executive Officer, stated: “We are pleased to deliver another solid quarter at Helen of Troy, highlighted by a 2.8% increase in total sales, driven primarily by new product introductions, online customer growth, incremental distribution, and growth in international sales. Importantly, we achieved growth of 5.9% in our Leadership Brand sales and a 17.9% increase in online sales. This growth, coupled with disciplined incremental investment spending, operating efficiency and lower tax expense led to an increase in adjusted diluted EPS of 26%. The quarter was again led by our Housewares segment, which grew sales 8.3%, followed by 2.4% growth in Health & Home. Beauty benefitted from new appliance introductions with segment net sales in line with the same period last year, and improved profitability driven by improved sales mix and operating efficiency. In Nutritional Supplements the sales decline moderated in the second quarter; however, we are not satisfied with the segment’s performance and continue to focus on improvement, while also pursuing strategic alternatives. In an effort to enhance the performance of our Nutritional Supplements and Beauty segments, we are initiating a restructuring plan we are calling Project Refuel. It focuses primarily on rightsizing the resources allocated to these businesses and improving the return on our investments. We are targeting annualized pre-tax savings of $10 million from Project Refuel once it is substantially implemented.”

Mr. Mininberg continued: “Looking more broadly, I am pleased with our progress in the first half of the year. During this period, we achieved total sales growth of 3.1% and an increase in our Leadership Brand net sales of 7.9%, most of which are growing share. In addition, sales to the online channel increased 23.0% and now represents 14.6% of our total sales. Adjusted diluted EPS grew 17% due primarily to disciplined incremental investment spending, operating efficiency, and lower tax expense. Our balance sheet is strong, with low leverage, which allows us to continue to pursue strategic acquisitions. For the year in total, we are reiterating our adjusted diluted EPS outlook despite the expectation of challenging conditions in the second half of the year. We now expect net sales revenue in the range of $1.560 to $1.585 billion, which reflects the substantial and continued uncertainty in the retail environment leading to changes in customer order patterns, much of which is driven by the impact of sweeping changes in consumer shopping preferences. Overall, we remain confident about our business and the choices we are making to position our company for continued long-term profitable growth through product innovation, increased operating efficiencies, and disciplined investments with a high return.”

Consolidated Operating Results - Second Quarter Fiscal 2018 Compared to Second Quarter Fiscal 2017

• Consolidated net sales revenue increased 2.8% to $378.5 million compared to $368.2 million, which included an increase of 0.1% from foreign currency fluctuations. The net sales increase includes the contribution from new product introductions, online customer growth, incremental distribution, and growth in international sales, partially offset by a 5.6% decline in the Nutritional Supplements segment, which had unfavorable impact of 0.5% on consolidated sales growth, a decrease in the personal care category within Beauty, and the impact of lower store traffic and soft consumer spending at traditional brick and mortar retail.
• Consolidated gross profit margin increased 0.1 percentage point to 44.4% compared to 44.3%. The increase in consolidated gross profit margin is primarily due to favorable product mix and growth in the Company’s Leadership Brands, partially offset by higher overall promotional spending with customers and the unfavorable impact that the revenue decline in Nutritional Supplements had on consolidated gross profit margin.
• Consolidated SG&A increased by 0.2 percentage points to 34.3% of net sales compared to 34.1%. The increase is primarily due to a $3.6 million charge related to the bankruptcy of Toys “R” Us, higher product liability expense and higher overall marketing, advertising and new product development expense in support of the Company’s Leadership Brands, partially offset by lower license royalty expense, lower incentive compensation expense, lower amortization expense, and improved distribution and logistics efficiency and lower outbound freight expense.
• GAAP operating income was $20.1 million, or 5.3% of net sales, compared to $37.5 million, or 10.2% of net sales in the same period last year. Operating income includes pre-tax non-cash impairment charges of $18.1 million and a $3.6 million charge related to the bankruptcy of Toys “R” Us, with no comparable charges in the same period last year. These items unfavorably impacted the year-over-year comparison of operating margin by 5.8 percentage points.
• Income tax expense as a percentage of pretax income was 45.3%, compared to 15.9% for the same period last year, primarily due to the recognition of tax benefits from impairment charges over the course of the year in relation to pre-tax income as opposed to the periods in which the charges were incurred. The net effect of this treatment resulted in an additional tax expense of $6.5 million in the second quarter of fiscal 2018. For the six months ended August 31, 2017, the Company has recognized $6.4 million of the expected $19.9 million tax benefit from impairment charges. The remaining tax benefit of $13.5 million will be recognized in the third and fourth quarters of fiscal 2018 relative to pre-tax income each quarter. Income taxes for the three months ended August 31, 2017 also includes a tax benefit of $2.2 million related to the favorable resolution of an uncertain tax position. There were no comparable expenses or benefits in the same period last year.
• Net income was $8.9 million, or $0.33 per diluted share on 27.4 million weighted average diluted shares outstanding, compared to $28.4 million, or $1.00 per diluted share on 28.2 million weighted average diluted shares outstanding. Net income for the three months ended August 31, 2017 includes an after-tax non-cash asset impairment charge of $24.6 million and a charge of $3.4 million related to the bankruptcy of Toys “R” Us, with no comparable charges for the same period last year.
• Adjusted EBITDA (EBITDA excluding non-cash asset impairment charges, the Toys “R” Us bankruptcy charge, and non‐cash share based compensation, as applicable) was $55.9 million compared to $51.8 million.

On an adjusted basis for the second quarters of fiscal 2018 and 2017, excluding non-cash asset impairment charges, the Toys “R” Us bankruptcy charge, non‐cash share based compensation, and non-cash amortization of intangible assets, as applicable:

• Adjusted operating income was $51.5 million, or 13.6% of net sales, compared to $47.9 million, or 13.0% of net sales, primarily reflecting a higher mix of Leadership Brand sales at a higher operating margin, lower license royalty expense, lower incentive compensation expense, lower amortization expense, and improved distribution and logistics efficiency and lower outbound freight costs. These factors were partially offset by (i) lower operating leverage in the Nutritional Supplements segment; (ii) higher product liability expense; and, (iii) higher marketing, advertising and new product development expense in support of the Company’s Leadership Brands.
• Adjusted income increased to $45.2 million, or $1.65 per diluted share, compared to $37.0 million, or $1.31 per diluted share, primarily reflecting the impact of higher adjusted operating income across all segments except for the Nutritional Supplements segment, and lower weighted average diluted shares outstanding year-over-year.

Segment Operating Results - Second Quarter Fiscal 2018 Compared to Second Quarter Fiscal 2017

Housewares core net sales increased by 8.3% reflecting an increase in online channel sales, incremental distribution with existing customers, expanded international and U.S. distribution, and new product introductions for both Hydro Flask and OXO brands. This growth includes the unfavorable impact of lower store traffic and soft consumer spending at traditional brick and mortar retail and the impact of slowing growth in the Outdoor sector. Net foreign currency fluctuations were immaterial to segment sales in the period. GAAP operating margin was 20.5% compared to 22.9%. Adjusted operating margin decreased 1.6 percentage points primarily due to higher marketing, advertising and new product development expense, partially offset by lower incentive compensation expense and the impact of increased operating leverage from net sales growth.

Health & Home net sales increased 2.4% reflecting growth in online channel sales, strong sales in certain seasonal categories, incremental distribution with existing customers, new product introductions, and growth in international sales. Segment net sales also benefitted from the favorable impact of net foreign currency fluctuations of approximately $0.3 million, or 0.3%. Segment net sales were partially offset by lower club sales and lower royalty revenue. GAAP operating margin was 5.2% compared to 6.5%. Adjusted operating margin decreased 0.1 percentage point reflecting an increase in marketing, advertising and new product development expense and an increase in product liability expense. These factors were partially offset by improved distribution and logistics efficiency and lower outbound freight costs, increased operating leverage from net sales growth, lower legal fee expense, and lower royalty expense.

Beauty core business net sales were unchanged at $84.6 million. Solid growth in both retail and professional appliance sales, particularly to online retail customers, was offset by declines in the personal care category due primarily to competitive conditions. Segment net sales benefitted from the favorable impact of net foreign currency fluctuations of approximately $0.2 million, or 0.2%. GAAP operating margin was 10.8% compared to 6.0%. Adjusted operating margin increased 4.5 percentage points reflecting the favorable impact of new product introductions in the appliance category, lower personnel expense, lower media advertising expense, and improved distribution and logistics efficiency and lower outbound freight costs. These factors were partially offset by the net sales decline in the personal care category and its unfavorable impact on sales mix and operating leverage. In an effort to enhance the segment’s performance, the Company plans to restructure the business as a part of Project Refuel. The restructuring will have a high concentration on the personal care business within Beauty. We expect 75% - 85% of the total targeted annualized savings of $10 million from Refuel to benefit the Beauty segment. We expect to incur restructuring charges as the plan is put into place.

Nutritional Supplements net sales decreased 5.6%, reflecting a decline in auto-delivery revenue resulting primarily from the transition to new order management and customer relationship management systems, partially offset by increases in direct mail and third-party retail sales. The segment’s operating loss was $20.3 million compared to an operating loss of $1.2 million in the same period last year. The Company recorded pre-tax non-cash asset impairment charges of $18.1 million with no comparable charges in the same period last year. Segment adjusted operating loss was $0.1 million compared to adjusted operating income of $0.7 million in the same period last year. The decrease in adjusted operating income is primarily due to the net sales decline and its unfavorable impact on operating leverage, and higher promotion, advertising and customer acquisition costs. These factors were partially offset by lower royalty expense and lower incentive compensation expense. The Company plans to restructure the business as part of Project Refuel in an effort to improve its performance. We expect 15% - 25% of the total targeted savings from Refuel to benefit Nutritional Supplements. We expect to incur restructuring charges as the plan is put into place. The Company continues to pursue strategic alternatives for this segment, which could include divestiture, further restructuring or realignment programs, and consolidation of operations and functions.

Balance Sheet Highlights - Second Quarter Fiscal 2018 Compared to Second Quarter Fiscal 2017

• Cash and cash equivalents totaled $13.7 million, compared to $25.8 million
• Total short- and long-term debt was $444.3 million, compared to $548.6 million, a net decrease of $104.3 million
• Accounts receivable turnover was 55.7 days, compared to 54.8 days
• Inventory was $325.6 million, compared to $317.5 million. Inventory turnover was 2.8 times compared to 2.7 times

Fiscal 2018 Annual Outlook

For fiscal 2018, the Company now expects consolidated net sales revenue in the range of $1.560 to $1.585 billion, which implies consolidated sales growth of 1.5% to 3.1%. The Company’s net sales outlook assumes that September 2017 foreign currency exchange rates will remain constant for the remainder of the fiscal year and that the severity of the cough/cold/flu season will be in line with long-term historical averages. Finally, the Company’s net sales outlook reflects the following expectations by segment:

• Housewares net sales growth of 8% to 10%;
• Health & Home net sales growth in the mid-single digits;
• Beauty net sales decline in the mid-single digits; and
• Nutritional Supplements net sales decline in the mid-single digits.

The Company’s current Housewares outlook reflects management’s expectation that solid growth achieved in the first half of fiscal 2018 for both OXO and Hydro Flask will moderate in the second half of the fiscal year due to weakness at brick and mortar retail, slowing growth in the Outdoor sector and a difficult comparison from new product introductions and distribution gains in the same period last year.

The Company expects consolidated GAAP diluted EPS of $4.01 to $4.34 and adjusted diluted EPS (non-GAAP) in the range of $6.50 to $6.90, which excludes after-tax asset impairment charges, the Toys “R” Us bankruptcy charge, share-based compensation expense and intangible asset amortization expense. The Company’s diluted EPS outlook assumes that September 2017 foreign currency exchange rates will remain constant for the remainder of the fiscal year.

Consistent with the Company’s strategies of investing in core business growth and consumer centric innovation, its outlook now includes approximately $0.40 to $0.50 per share year-over-year in incremental after-tax growth investments expanding digital marketing, advertising, new product development and e-commerce, primarily behind the Company’s Leadership Brands. The revised incremental spending plan partially reflects the effectiveness achieved from the Company’s spend in the first half of the year. It also includes a shift in the timing of some planned investment to the second half of the year. The diluted EPS outlook is based on an estimated weighted average diluted shares outstanding of 27.4 million.

As previously mentioned, the Company is initiating Project Refuel, which is targeted to achieve annualized pre-tax cost savings of $10.0 million once the plan is substantially implemented. The Company expects the plan to be completed in approximately 18 months, with the savings highly concentrated in fiscal 2019. The Company expects to incur restructuring charges related to this plan in the range of $4.0 million to $6.0 million over the course of the implementation period.

The Company now expects a reported effective tax rate range of (4.6)% to (2.6)%, and an adjusted effective tax rate range of 9.2% to 11.2%, which compares to the Company’s prior outlook of 10% to 12%, for the remainder of fiscal year 2018. The adjusted effective tax rate range excludes the impact of asset impairment charges on tax expense for the remainder of fiscal year 2018. Please refer to the schedule entitled “Effective Tax Rate and Adjusted Effective Tax Rate (Non-GAAP)” in the accompanying tables to this press release.

The likelihood and potential impact of any fiscal 2018 acquisitions and divestitures, future asset impairment charges, future foreign currency fluctuations, or further share repurchases are unknown and cannot be reasonably estimated; therefore, they are not included in the Company’s sales and earnings outlook.

Conference Call and Webcast

The Company will conduct a teleconference in conjunction with today's earnings release. The teleconference begins at 4:45 p.m. Eastern Time today, Thursday, October 5, 2017. Institutional investors and analysts interested in participating in the call are invited to dial (888) 455-2263 approximately ten minutes prior to the start of the call. The conference call will also be webcast live at: www.hotus.com. A telephone replay of this call will be available at 7:45 p.m. Eastern Time on October 5, 2017 until 11:59 p.m. Eastern Time on October 12, 2017 and can be accessed by dialing (844) 512-2921 and entering replay pin number 8041398. A replay of the webcast will remain available on the website for 60 days.

Non-GAAP Financial Measures:

The Company reports and discusses its operating results using financial measures consistent with accounting principles generally accepted in the United States of America (“GAAP”). To supplement its presentation, the Company discloses certain financial measures that may be considered non-GAAP financial measures, such as Leadership Brand net sales, adjusted operating income, adjusted operating margin, adjusted effective tax rate, adjusted income, adjusted diluted EPS, EBITDA and adjusted EBITDA, which are presented in accompanying tables to this press release along with a reconciliation of these financial measures to their corresponding GAAP-based measures presented in the Company’s consolidated statements of income.

About Helen of Troy Limited:

Helen of Troy Limited (NASDAQ, NM: HELE) is a leading global consumer products company offering creative solutions for its customers through a strong portfolio of well-recognized and widely-trusted brands, including OXO®, Hydro Flask®, Vicks®, Braun®, Honeywell®, PUR®, Febreze®, Revlon®, Pro Beauty Tools®, Sure®, Pert®, Infusium23®, Brut®, Ammens®, Hot Tools®, Bed Head®, Dr. Sinatra®, Dr. David Williams, and Dr. Whitaker®. All trademarks herein belong to Helen of Troy Limited (or its affiliates) and/or are used under license from their respective licensors.

For more information about Helen of Troy, please visit www.hotus.com.

Forward Looking Statements:

Certain written and oral statements made by our Company and subsidiaries of our Company may constitute "forward-looking statements" as defined under the Private Securities Litigation Reform Act of 1995. This includes statements made in this press release. Generally, the words "anticipates," "believes," "expects," "plans," "may," "will," "should," "seeks," "estimates," "project," "predict," "potential," "continue," "intends," and other similar words identify forward-looking statements. All statements that address operating results, events or developments that we expect or anticipate will occur in the future, including statements related to sales, earnings per share results, and statements expressing general expectations about future operating results, are forward-looking statements and are based upon our current expectations and various assumptions. We believe there is a reasonable basis for our expectations and assumptions, but there can be no assurance that we will realize our expectations or that our assumptions will prove correct. Forward-looking statements are subject to risks that could cause them to differ materially from actual results. Accordingly, we caution readers not to place undue reliance on forward-looking statements. The forward-looking statements contained in this press release should be read in conjunction with, and are subject to and qualified by, the risks described in the Company's Form 10-K for the year ended February 28, 2017 and in our other filings with the SEC. Investors are urged to refer to the risk factors referred to above for a description of these risks. Such risks include, among others, our ability to deliver products to our customers in a timely manner and according to their fulfillment standards, the costs of complying with the business demands and requirements of large sophisticated customers, our relationships with key customers and licensors, our dependence on the strength of retail economies and vulnerabilities to any prolonged economic downturn, our dependence on sales to several large customers and the risks associated with any loss or substantial decline in sales to top customers, expectations regarding any proposed restructurings, our recent and future acquisitions or divestitures, including our ability to realize anticipated cost savings, synergies and other benefits along with our ability to effectively integrate acquired businesses or separate divested businesses, circumstances which may contribute to future impairment of goodwill, intangible or other long-lived assets, the retention and recruitment of key personnel, foreign currency exchange rate fluctuations, disruptions in U.S., U.K., Euro zone, and other international credit markets, risks associated with weather conditions, the duration and severity of the cold and flu season and other related factors, our dependence on foreign sources of supply and foreign manufacturing, and associated operational risks including, but not limited to, long lead times, consistent local labor availability and capacity, and timely availability of sufficient shipping carrier capacity, risks to the Nutritional Supplements segment associated with the availability, purity and integrity of materials used in the manufacture of vitamins, minerals and supplements, the impact of changing costs of raw materials, labor and energy on cost of goods sold and certain operating expenses, the geographic concentration and peak season capacity of certain U.S. distribution facilities increases our exposure to significant shipping disruptions and added shipping and storage costs, our projections of product demand, sales and net income are highly subjective in nature and future sales and net income could vary in a material amount from such projections, the risks associated with the use of trademarks licensed from and to third parties, our ability to develop and introduce a continuing stream of new products to meet changing consumer preferences, increased product liability and reputational risks associated with the formulation and distribution of vitamins, minerals and supplements, the risks associated with potential adverse publicity and negative public perception regarding the use of vitamins, minerals and supplements, trade barriers, exchange controls, expropriations, and other risks associated with U.S. and foreign operations, the risks to our liquidity as a result of changes to capital market conditions and other constraints or events that impose constraints on our cash resources and ability to operate our business, the costs, complexity and challenges of upgrading and managing our global information systems, the risks associated with information security breaches, the increased complexity of compliance with new government regulations covering vitamins, minerals and supplements, the risks associated with product recalls, product liability, other claims, and related litigation against us, the risks associated with accounting for tax positions, tax audits and related disputes with taxing authorities, the risks of potential changes in laws in the U.S. or abroad, including tax laws, regulations or treaties, employment and health insurance laws and regulations, and laws relating to environmental policy, financial regulation, transportation policy and infrastructure policy along with the costs and complexities of compliance with such laws, and our ability to continue to avoid classification as a controlled foreign corporation. We undertake no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise.

(8) The diluted EPS outlook is based on an estimated weighted average shares outstanding of 27.4 million for fiscal year 2018.

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