Helen of Troy Faces Massive Challenges (NASDAQ:HELE)

Folks, this market is treacherous. While there have been some signs of life in a few previous sessions, these sessions have been met with huge bouts of selling. Folks, the market has been in a bear state almost all year, with only select rallies. Over the last month and a half, there has been some serious pain. Retail stocks have largely been crushed. All of the pain we are seeing in stocks is due to inflation in the price of nearly everything over the last year, and subsequently the Federal Reserve’s actions to fight the inflation through rate hikes. There is just so much uncertainty on the Street. There is fear and there is confusion on what the right valuations are for the market overall and for individual stocks. One thing we know is that earnings estimates are largely coming down, and we are already seeing the signs of pressure on businesses. While we do not know how far the Fed will go, or how far they will actually raise rates, but retail has started getting crushed. One name that we recently were stopped out on a trade in was Helen of Troy (NASDAQ:HELE). The company just reported earnings and those results were strong but the outlook seems to suggest we may be facing a bit of a recession already. Let us discuss, and check back in on Helen of Troy’s performance and further discuss what we see ahead for the rest of fiscal 2023.

Discussion

We had been bullish on this name for a long time, and frequently traded the stock. Our last trade did not pan out, though the market has been in freefall for the last two months. Here is what we know. The amazing trends that we saw during the COVID-19 pandemic have now shifted as it relates to overall sales for the company. There has been a reduction in health supply sales, though beauty trends seem to be on the increase. As a whole, sales grew from last year, but trends shifted because last year’s sales were still impacted by Vicks since much of the world was still uncertain about the pandemic and was buying up home remedies for the Delta and then the Omicron variants. But fiscal Q2 saw beat consensus and were ahead of expectations.

Strong management, and the headline results impress

Once again, here in Q2, shifts in consumer preferences and COVID-19 moving to more of an endemic condition led to changes in sales trends for the company. The company reported sales figures that were up last year. Sales were driven by improvement in Home and Outdoor and Health and Wellness, with both segments seeing double-digit growth but declines in Beauty. We want to be clear that we like management here. Management has been selling underperforming business lines and making separate accretive acquisitions for years. If you recall in Q4 of fiscal 2020, Helen of Troy committed to a plan to divest certain assets within its Beauty segment’s mass channel personal care business. 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 offloading businesses, sales increased.

We were expecting sales to be flat but overall were up 9.7% Sales came in at $521.4 million, up from $475.2 million a year ago. That was welcomed news. While higher revenues were great inflationary pressures really hurt margins, and it led to EPS declining year-over-year. 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 increased marketing expense. Adjusted diluted EPS was $2.27, a decrease of 14.3% from fiscal 2022. That was a negative, but still beat expectations. However the outlook is unnerving.

But the outlook suggest consumers are feeling the pinch

Make no mistake, the overall fiscal Q2 results were strong overall on the headline numbers. A beat versus expectations is always welcomed, but the stock got slammed due to a reduction in the outlook, with Julien Mininberg, an exceptional CEO, being very cautious. He stated in the release:

Although we reported results in-line with our expectations for the quarter, we see consumers increasingly adjusting their spending patterns in response to rising inflation and the impact of higher interest rates, particularly in our premium segments in some categories…We expect the current external operating environment to remain highly challenging, causing us to lower our fiscal year 2023 outlook.

So what kind of reductions are we talking here? Well, Helen of Troy really took down its expectations. In this environment, the company now expects consolidated net sales revenue in the range of $2.00 billion to $2.05 billion. Unfortunately compared to last year this would be a decline of 8% to 10% in sales. If we look to the segments, Home & Outdoor net sales should growth of 3.5% to 5.5%, but Health & Wellness will drop 13% to 11% while Beauty Core business net sales will crater of 21% to 19%. This is due to expectations for consumers tightening up mightily. While the company seeks to cut expenses, EPS is going to crater. Adjusted EPS will fall to $9.00 to $9.40, which assigns a 10-10.5X FWD EPS multiple. Shares are definitely cheap right now. But cheap can get cheaper, if things worsen.

Restructuring operations

One thing we like here, other than the solid management, despite the drop in the outlook in this economy, is that the company is undergoing a restructuring. This plan was just announced with earnings. The plan is intended to expand operating margins by improving efficiency and reduce costs. The company is looking to reduce the cost of good sold, and reduce selling and general expenses. Further, Helen of Troy management has implemented plans to reduce inventory levels, increase inventory turns, and improve cash flow and working capital.

Looking ahead

The stock is cheap, but we need to let the company’s actions start to have an impact. We rate HELE stock a hold here, but can see why speculators might buy betting on a turnaround. We think that the plan will help, but shares are likely a better buy in early 2023. We would like to see another quarter of data before trading this name again.