Helen of Troy Limited (NASDAQ:HELE) Q4 2024 Earnings Call Transcript April 24, 2024
Helen of Troy Limited beats earnings expectations. Reported EPS is $2.45, expectations were $2.31. HELE isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Jack Jancin: Thank you, operator. Good morning, everyone. Welcome to the Helen of Troy Fourth Quarter Fiscal 2024 Earnings Conference Call. The agenda for the call this morning is as follows. I’ll begin with a brief discussion of forward-looking statements. Ms. Noel Geoffroy, the company’s CEO will comment on business performance and key accomplishments and then provide some perspective as we begin the new fiscal year. Then, Mr. Brian Grass, the company’s CFO, will review the financials in more detail and comment about current trends and expectations for the upcoming fiscal year. Following this, we will take questions you have for us today. This conference call may contain certain forward-looking statements that are based on management’s current expectations with respect to future events or financial performance.
Generally, the words anticipates, believes, expects, and other words similar are words identifying forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that could cause anticipated results to differ materially from the actual results. This conference call may also include information that may be considered non-GAAP financial information. These non-GAAP measures are not an alternative to GAAP financial information and may be calculated differently than the non-GAAP financial information disclosed by other parties. The company cautions listeners not to place undue reliance on forward-looking statements or non-GAAP information. Before I turn the call over to Ms. Geoffroy, I would like to inform all interested parties that a copy of today’s earnings release has been posted to the Investor Relations section of the company’s website at www.helenoftroy.com.
The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures. The release can be obtained by selecting the Investor Relations tab on the company’s home page and then the Press Releases tab. I will now turn the call over to Ms. Geoffroy.
Noel Geoffroy: Thank you, Jack. Hello, everyone, and thank you for joining us today. Today marks my first public remarks as Helen of Troy’s CEO. I’m honored to lead this great organization with an inspiring purpose of elevating lives in moments that matter everywhere, every day, and I’m optimistic and energized by what lies ahead for the company. Today, we reported fourth quarter results that came in ahead of our expectations. We exceeded the full year fiscal ’24 consolidated net sales and adjusted EPS outlook we provided in January. During this fiscal year, we expanded gross profit margin by 390 basis points and increased adjusted operating margin by 50 basis points, even as we used fuel generated by Project Pegasus to make incremental strategic investments in our business.
We generated $269 million in free cash flow and strengthened our durable balance sheets by reducing our total debt by $269 million to $665.7 million. I am pleased with the continued execution and consistency of our results, particularly in light of an ongoing difficult macroeconomic environment and the changes that our organization is navigating. Today’s results reflect the strength of our brand portfolio, the progress of our strategic initiatives, and the talent and dedication of our associates, all of which provides us with a strong platform to build upon in fiscal ’25 and beyond. During the past fiscal year, we made significant progress on the goals we set for ourselves. I am pleased with the passion and engagement of the entire Helen of Troy team as we continue to embrace our new structure as a true global operating company.
This structure includes next-level centralization of shared services to leverage our functional expertise, our first ever centralized marketing center of excellence to bring new capability and scale, business units that are even more focused on brand building and consumer centric innovation, and our newly formed North American Regional Market Organization, or NARMO, which mirrors our International RMO to drive excellence in market execution. Despite fiscal ’24 being one of the tougher macroeconomic years for discretionary consumer goods, we found a way to deliver our plan while navigating a number of challenges, including inflationary pressures coupled with continued predictions of recession, lengthy COVID hangover effects impacting some of our categories, shopping patterns between brick-and-mortar and online, changes in the retailer landscape as they adjusted to consumer spending and shopping dynamics, and the effects of geopolitical events.
We braced for the impacts of these challenges and responded by lowering inventories, reducing costs, leveraging our scale to find new growth opportunities, and keeping a laser focus on ROI with the investment fuel generated by Project Pegasus. Last October, we unveiled Elevate for Growth, our exciting six-year strategic plan that represents an important pivot for the company. The plan emphasizes increased growth investment and a new portfolio management approach with defined criteria to make sharper resource allocation choices based on growth potential and return on investment. We also doubled down on delighting consumers with next-level brand-building and innovation. We are striving for consumer obsession in all that we do. We committed to upgrading our data insight and analytic capabilities to solve business issues better and faster to enhance our productivity.
Our new state-of-the-art distribution center in Galloway, Tennessee that opened in fiscal ’24 is a great example of that. We did all this while still preserving the company’s strong foundation, balance sheet, and long-term investments that we believe will deliver a bright future for all Helen of Troy stakeholders. Before turning to our fourth quarter results, I want to highlight four foundational elements of Elevate for Growth that I spoke about during October’s Investor Day. These four elements excite me and give me confidence that we will emerge in a stronger position, even as we navigate an environment where we expect consumers will continue to face tough choices when it comes to discretionary spending. First, we have a diversified and well-recognized family of trusted brands with an enviable reputation as a leader across multiple categories and geographies.
Our brands continue to be highly rated by consumers and receive awards and recognition from prestigious periodicals and industry organizations, such as consumer reports, Wired, Red Dot, Good Housekeeping, Beauty Publications, Food Network, and Forbes. We believe our strong brands have many opportunities to stretch into attractive adjacent spaces to further excite existing consumers and attract new ones. We identified new opportunities to expand distribution of our brands into incremental channels and customers, and those efforts paid off in fiscal ’24 as we surpass the internal goals we set for ourselves. For example, at one of our key mass customers, we secured higher than expected incremental distribution of our OXO outdoor grilling line and key Revlon hair appliances.
We expect to further benefit from a full fiscal year of this new distribution in addition to even more opportunities in fiscal ’25. Second, we are generating fuel from Project Pegasus to incrementally invest in growth opportunities and capabilities. This will enable us to strategically invest in our brands with precision marketing and further product and commercial innovation. Third, we are advantageously positioned to fully leverage our operational and organizational scale and assets. I am delighted that our team is embracing our new global operating model to enable greater focus and centralized expertise. I am also excited to fully leverage our new state-of-the-art Tennessee distribution center to bring significant new scale and service capabilities that will set us up for years to come.
Finally, and most importantly, I’m energized as I continue partnering with our talented and exceptional associates to further build on our strong culture. I am proud of our ability to attract, develop and retain a diverse team. I believe our culture is a competitive advantage that delivers benefits to all our stakeholders by bringing new perspectives, experiences and expertise resulting in great brands that elevate consumers lives with thoughtful and effective solutions. Turning now to fourth quarter business results. Consolidated net sales increased 1% as we benefited from growth in online, international, club channel sales and Home & Outdoor and prestige hair care. These factors were partially offset by declines in air purifiers, fans and heaters driven by our SKU rationalization efforts and softer consumer demand and a decline in humidification reflecting cough/cold/flu illness below the prior year and pre-COVID historical averages.
Adjusted diluted EPS was $2.45 or a 21.9% increase over the same period last year and also slightly ahead of our expectations. Overall macro trends in the quarter reflected a consumer who remained cautious with their money and increasingly prioritized their discretionary spending on travel and other entertainment experiences over tangible goods. As we move into fiscal ’25 we are seeing these trends intensify. Turning now to our segments. Home & Outdoor net sales increased 5.4% over the prior year period due to growth in the home category, insulated beverage ware, packs and travel and international. OXO remains the number one branded line in the kitchen utensils and canister food storage categories and gain share in kitchen utensils over the last 12 month period.
The brand achieved strong results driven by distribution gains in the mass channel, the timing of club promotional programs as well as strength and new distribution in grocery. International was also a highlight in the quarter. Seeing win we’re the shopper shop is one of our elevate for growth strategic choices. I’m pleased to share that our NARMO and Home & Outdoor teams have collaborated to secure exciting OXO distribution wins. At Walmart our OXO soft work kitchen gadgets have expanded. We added our grilling line and we are pleased to gain additional placement for OXO in other key categories later in fiscal ’25. This is notable as 90% of the U.S. population lives within 10 miles of a Walmart store. Hydro Flask performed well online driven by continued positive reception to our new travel tumbler, seasonal colors and promotion as well as post-holiday replenishment.
We are excited about where we are heading on this key brand. Being consumer obsessed with Hydro Flask means launching on trend color, design, style, customization and personalization options. In addition, we need to offer different container and cap configurations to meet the needs of various consumer use occasions, whether in the car, at the gym, in the park, around the house or at school. We are also evolving our marketing content and targeting with support of our new marketing center of excellence, allowing us to better connect with our Hydro Flask consumer with the right message in the right place at the right time. You’ll see us expand on these concepts with new product offerings such as the new sugar crush limited edition available in bottles and travel tumblers featuring a beautiful waterfall of pastel colors and the new insulated shaker bottle designed with an internal whisk ball perfect for mixing a smoothie or protein shake.
You will also see us further expand distribution of Hydro Flask in fiscal ’25. Osprey sales should strengthen internationally with growth in EMEA and APAC on strong demand for travel pack. In North America, we made further inroads in key sporting goods retailers. For fiscal ’24, overall U.S. brand share strengthened for luggage and we extended our number one position in technical pack. 2024 marks Osprey’s 50 year anniversary and we were honored to be recognized in outside magazine. Osprey’s focus remains on making the world’s best past suited for a wide range of activities featuring our unique and superior design craftsmanship and commitment to sustainability all backed by our almighty guarantee. Our new collection continues to build on the brand’s strengths and heritage including new designs for different occasions like biking, day packs and inclusive sizes so everyone can experience the outdoors with the very best gear.
Perfect examples are three new additions to Osprey’s extended fit line of packs which became available this spring and are already garnering positive consumer response on social media. Osprey’s Farpoint 55 travel pack has also been a hit achieving 4.6 stars in Amazon out of over 1300 reviews. We believe Osprey has a bright future ahead building on its strengths continuing to extend into new adjacencies and leveraging the Helen of Troy operational and organizational scale. Switching gears now to our Beauty & Wellness segment, net sales declined 2.5% primarily driven by air purifiers fans and heaters reflecting softer consumer demand and our SKU rationalization efforts. We also saw a decline in humidification reflecting a cumulative cough/cold/flu season illness instance below the prior year and pre-COVID historical averages.
These factors were partially offset by growth in hair appliances and thermometry which helped drive overall international sales and growth and prestige hair care. We also benefited from an incremental seven weeks of Curlsmith sales compared to the prior period as we acquired Curlsmith in April 2022. In Beauty, online sales for our volumizers strengthened in the quarter and we also benefited from incremental doors and distribution in the mass channel across our hair tool portfolio. Drybar and Curlsmith Prestige continued their momentum driven by their innovation pipeline and marketing support. As one example, Drybar hot roller club rollers arrived at our key retailers in early February and quickly became a consumer sought after innovation making it our best selling tool in those retailers within weeks.
In Wellness, cough/cold/flu season was below the prior year and pre-COVID historical average for both our quarter and the fiscal year. This impacted sales of our products designed to help relieve cough/cold and congestion symptoms such as humidifiers, inhalants and related consumables. As mentioned during our January call, we saw a softer start to the season. As the quarter progressed influenza like illnesses increased some and retailers were able to meet this consumer demand with their existing inventory. Therefore we have not seen incremental replenishment orders so far in Q1 of fiscal ’25. International was a stand-up in the quarter posting double digit growth as we benefited from more focused strategic choices on must win brands and markets, strengthen distribution and distributor partnerships and implemented a more integrated organizational structure of our EMEA team.
Growth was driven by performance in EMEA with strong demand for both Braun and Revlon. Hydro Flask benefited from our new strategic outdoor sports lifestyle and travel initiatives in Europe while leveraging Osprey’s European distribution footprint to accelerate growth. We will continue to prioritize international growth leveraging the must win brand and market choices selected and elevate for growth. Looking ahead, as we face what we believe will be a tough environment of increasingly soft consumer discretionary spending I’m confident that our strategic plan and efforts position us to achieve our fiscal ’25 objectives which Brian will take you through shortly. In the current business environment we believe it is imperative that we remain agile, invest incrementally to further strengthen our brand, leverage our organizational structure and scale and control our controllables.
Elevate for Growth and Project Pegasus are about leveraging our organization to unleash its full potential and ensuring that the framework and our associates are fully equipped to keep up with the pace of change. Just last month I was delighted to attend our new unified NARMO annual sales meeting. The enthusiasm and power of this event was inspiring. You could feel the optimism, teamwork, and focus towards elevating our brands to deliver our growth goals. Globally we have an outstanding worldwide organization that is motivated by our purpose and values and excited for our future. Our purpose and values set a high bar and this will remain the most important element of Helen of Troy. Elevating lives and moments that matter everywhere, every day is something that matters to all our stakeholders and importantly can stand the test of time.
I am excited and feel incredibly fortunate to have an exceptional team of determined associates whose dedication and passion will help further elevate our company in this next era. I am confident that the best is yet to come. Before turning the call over to Brian, I would also like to let the investment community know that at the end of May, Jack Jancin, Senior Vice President of Corporate Business Development, will be retiring after 40-years in the consumer products industry, 20 of them at Helen of Troy. Many of you know Jack from the various events and meetings over the past 10-years. He has been instrumental to increasing Helen of Troy’s visibility within the financial community and leading our M&A activities. We are so grateful for his many years of service and contributions and would like to extend our warmest congratulations and best wishes for his future endeavors.
I would also like to welcome [indiscernible], our new Senior Vice President, Business Development and Investor Relations who joined us on April 1. She brings a wealth of experience and fresh perspective to our team. Many of you also know Anne Rakunas, our Director of External Communications and Investor Relations who will remain the main point of contact for all investor inquiries. Now I will pass the call over to Brian.
Brian Grass: Thank you, Noel. I’m pleased to report fourth quarter results that again exceeded our expectations. We delivered net sales and adjusted EPS ahead of our outlook. We expanded gross profit and adjusted EBITDA margins. And our business continued to generate strong pre-cash flow. As Noel mentioned, fourth quarter consolidated net sales increased 1% despite unfavorable impacts from SKU rationalization and the bankruptcy of Bed, Bath and Beyond. Driven by growth from OXO, Hydro Flask, Osprey, Drybar, Braun, Revlon and Curlsmith. Growth was partially offset by declines in Honeywell, Vicks, PUR and Hot Tools. Growth profit margin improved 570 basis points to 49% compared to 43.3% in the same period last year, just slightly above our expectations for the quarter.
Year-over-year improvement was due to lower inbound freight and commodity costs, a decrease in inventory reserve expense, lower trade discount promotional program expense, and a more favorable product mix within Beauty & Wellness, including the benefits of SKU rationalization. These factors were partially offset by a less favorable customer and product mix within Home & Outdoor. GAAP operating margin for the quarter was 13.5% compared to 11.1% in the same period last year. On an adjusted basis, operating margin increased 320 basis points to 17%. The increase was driven by the gross profit improvement I just referred to, partially offset by increased marketing investment, higher annual incentive compensation expense, and higher expense associated with the ramp up of our Tennessee distribution facility.
On a segment basis, Home & Outdoor adjusted operating margin increased 160 basis points to 18.7%, driven by lower commodity and inbound freight costs, lower trade discount promotional program expense, and a decrease in inventory reserve expense. These factors were partially offset by higher expense associated with the ramp up of our Tennessee distribution facility, an increase in annual incentive compensation expense, and a less favorable customer and product mix. Adjusted operating margin for Beauty & Wellness increased 440 basis points to 15.6%, driven by lower inbound freight, a decrease in inventory reserve expense, lower trade discount promotional program expense, decreased distribution expense, and a more favorable product mix, including the benefits of SKU rationalization.
These factors were partially offset by an increase in marketing investment, and a higher annual incentive compensation expense. Net income was $42.7 million or $1.79 per diluted share. Non-GAAP adjusted diluted EPS grew 21.9% to $2.45 per share, primarily due to higher adjusted operating income in both segments, lower interest expense, higher interest income, and lower shares outstanding, partially offset by an increase in the adjusted effective tax rate. We continued to generate strong cash flow with cash from operations of $73.6 million in the fourth quarter, in line with our expectations. We ended the quarter with total debt of $666 million, a decrease of $269 million compared to fiscal ’23. Our net leverage ratio was 2 times compared to 2.8 times at the same time last year.
Stepping back to look at the full fiscal year, I’m pleased with the consistency of our financial performance and our ability to meet or exceed our full year outlook commitments, including net sales, adjusted EBITDA margins, interest expense, adjusted EPS, free cash flow, and ending net leverage ratio. I’m also pleased with the improved performance in year-over-year sales and other key measures throughout the course of the year. While full year consolidated sales declined 3.3%, this included the year-over-year declines from SKU rationalization and the Bed, Bath & Beyond bankruptcy of approximately 3.4% combined and the slightly ahead of our full year outlook. We improved gross margin by 390 basis points driven by lower inbound freight, SKU rationalization, lower inventory reserve expense, and the favorable comparative impact of EPA compliance costs incurred in the prior year.
We improved adjusted EBITDA margin by 100 basis points despite structural headwinds and lower operating leverage, even as we increased our marketing investment $10 million beyond our original target. We generated free cash flow of $269.4 million reaching the high end of our outlook which helped us beat our original interest expense expectations, make $50 million a share repurchase not included in our original outlook, and still end the year with leverage in line with expectations. Finally, we made progress in our effort to optimize our brand portfolio through a potential divestiture and are actively engaged in a process that we hoped to complete in the second quarter of fiscal ’25. The likelihood, timing, and potential impact of the divestiture cannot be reasonably estimated at this time and therefore is not included in our outlook.
We will make an announcement when we have more to share and if the divestiture does occur, we will update our outlook at that time. Fiscal ’25 begins our elevate for growth era which provides our strategic roadmap through fiscal ’30. We intend to further leverage our operational scale and assets, including our state-of-the-art Tennessee distribution center, improve the go-to-market structure with the North America RMO and our expanded shared service capabilities to grow organic sales, further expand margins, and deploy capital through strategic acquisitions, share repurchases, and capital structure management. Turning to our full year outlook for fiscal ’25, we have factored in a number of variables, including our view of lingering inflation, interest rates that are higher for longer, lower growth expectations from certain retailers, a softer consumer that is further prioritizing their more limited discretionary spend on experiences and services, and a cough/cold/flu season in line with pre-COVID historical averages.
In terms of retail inventory, while we see pockets of higher leaks on hand in some of our categories, we believe retail inventory is healthy overall and we generally expect sell-in to closely match sell-through. With the fuel from Pegasus, the operational improvements we’ve made and our elevate for growth strategies, we believe we are well positioned to navigate what we expect will be a softer consumer spending environment. We expect net sales between $1.965 billion and $2.025 billion in fiscal ’25, which implies a decline of 2% to growth of 1%. In terms of our net sales outlook by segment, we expect Home & Outdoor growth of 1% to 4% and the Beauty & Wellness decline of 4.5% to 1.5% which includes a year-over-year headwind of approximately 1% related to the expiration of an out-licensed relationship of one of our wellness brands.
We expect GAAP diluted EPS of $6.68 to $7.45 for the full year and non-GAAP adjusted diluted EPS in the range of $8.70 to $9.20 which implies an adjusted diluted EPS decline of 2.4% to growth of 3.3%. We expect adjusted EBITDA margins to decline roughly 40 basis points as benefits from Pegasus and other gross profit improvements are reinvested for growth. We see the current softness in the environment as an opportunity to further invest in the health of our brands and grow our market share. As such, our outlook reflects a year-over-year increase in growth investment spending of roughly 100 basis points on top of an increase of 100 basis points in fiscal ’24. Our adjusted EBITDA outlook also includes a year-over-year headwind of approximately 50 basis points from the exploration of the out-licensed relationship I referred to earlier and some expected margin compression from enterprise technology initiatives included in the Elevate for Growth Strategic Plan that are beginning in fiscal ’25.
In terms of Project Pegasus, we have updated our expectations to reflect the choices we are making to maximize the benefits of these initiatives while minimizing the transitional risk. We are maintaining the total estimated savings of $75 million to $85 million over the duration of the plan but have revised the cadence of estimated savings recognition now extending into fiscal ’27. After achieving our fiscal ’24 Pegasus targets, we now expect the savings in fiscal ’25 to be approximately 35% of the total and the balance of savings to fall across fiscal ’26 and ’27. We are also lowering the total estimated restructuring charges by $10 million. We now expect one-time pre-tax restructuring charges for approximately $50 million to $55 million over the duration of the plan compared to our previous estimate of $60 million to $65 million.
We continue to expect restructuring charges to be completed during fiscal ’25. We expect a GAAP effective tax rate range of 19% to 21% for the full fiscal year and a non-GAAP adjusted tax rate range of 17.2% to 18.3%. We expect capital and tangible asset expenditures of between $30 million and $35 million for fiscal ’25, which includes remaining equipment technology of approximately $8 million associated with our New Tennessee distribution facility and initial capital expenditures related to the first phase of Enterprise Technology initiatives I referred to earlier. We expect free cash flow in a range of $255 million to $275 million and adjusted EBITDA of $324 million to $331 million. Net leverage ratio as defined in our credit agreement is expected to be between 1.25 times and 1 times by the end of fiscal ’25.
In terms of quarterly cadence of sales, we expect a decline of approximately 7% to 5% in the first quarter of fiscal ’25 in a range of flat to 3% growth for each of the remaining quarters. We expect a slight decline in adjusted EPS for the first half of fiscal ’25 with a decline of approximately 15% to 20% in the first quarter and nearly offsetting growth in the second quarter. We expect adjusted EPS in the range of flat to 5% growth in the second half of fiscal ’25. In summary, we’re pleased to provide an outlook with both net sales and adjusted EPS growth at the high end of our range, further implied growth margin expansion, a significant increase in growth investment, strong free cash flow, further balance sheet productivity and capital deployment optionality.
Our free cash flow outlook at the high end of the range implies a forward free cash flow yield of 11.6% using Monday’s market capitalization. Our adjusted EBITDA outlook at the high end of the range implies an EV to forward EBITDA multiple of 9.1 times using Monday’s market capitalization and our outstanding debt at the end of fiscal ’24. We believe these are compelling metrics with strong underlying business fundamentals that compare favorably with our peer set and the market overall. And finally, I want to close by recognizing and congratulating Jack Jancin on his retirement after a distinguished career. I’ve been fortunate to work with Jack for almost 20-years now and have long admired his wisdom, leadership, charm and sense of humor. His contributions to Helen of Troy are immeasurable and he will be missed.
But I’m happy for him and all the boards he will soon meet. Jack, I can only hope that you’re better at retirement than I was. And with that, I’ll turn it back to the operator for questions.
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