How many times in the past has a company made a big acquisition with high hopes for the future, only to have those hopes dashed by one problem or another? Rarely do large deals work out for the best. Look no further than surf wear maker Quiksilver (NYSE:ZQK) for proof. In 2005, the Huntington Beach lifestyle brand bought Rossignol Group for $320 million. Three years and a lot of red ink later, Quiksilver is trying to unload the French ski company, most likely at a reduced price from what it paid earlier in the decade.

The acquisition game is anything but a sure thing, but one company that rolled the dice and looks to be winning is Helen of Troy (Nasdaq:HELE), an El Paso, Texas-based consumer products company.

From Hot Air to Kitchenware
In May 2004, Helen of Troy paid World Kitchen LLC $275 million for its kitchenware business called OXO International. Many wondered at the time why Helen of Troy would buy a kitchenware company when it's in the hairdryer business, but it's simple really. OXO wants to take its design philosophy to every room in the house. I own several of their kitchen gadgets and I'm pretty certain it can design anything it puts its mind to.

An analyst with investment banking firm Houlihan Lokey Howard & Zukin commented that Helen of Troy would take OXO's leadership position into the personal care field providing a differentiated product. If sales are any indication, it's on the right track. In 2008, Housewares grew 19.7% while Personal Care was down 1.9%. With only a quarter of sales, it managed to contribute 43% of operating income. A key reason: margins are more than double the Personal Care segment.

Innovation Goes A Long Way
In fiscal 2008, Helen of Troy introduced 526 products and is currently developing another 389. OXO introduced 120 items in 2008, and is working on another 100 for 2009. With most of its products made by third parties in China, it's important to get the designs just right before beginning production.

OXO has some serious competition in National Presto Industries (NYSE:NPK), Lifetime Brands (Nasdaq:LCUT) and conglomerate Nacco Industries (NYSE:NC), owners of the Hamilton Beach and Proctor Silex Brands. That's why innovation is the key to improving profits and margins, especially on the personal care side. It still has a long way to go.

In 2004, revenues were $474.87 million with operating income of $85.78 million. This compares with 2008 revenue of $652.55 million and operating income of $73.92 million. In four years, sales have increased by only $180 million and operating income dropped by $12 million. The numbers have to improve. (For more on what these numbers mean for stockholders, check out Analyzing Operating Margins.)

A Nice Surprise
On the morning of July 8, 2008, the company announced first quarter non-GAAP earnings of 42 cents per share. This was a 40% surprise to the upside, beating analyst estimates by 12 cents. As a result, the stock jumped 16% in the day's trading. These numbers exclude three special items in the quarter, two of which offset one another, leaving a $7.6 million impairment charge for the write down of some of its trademarks.

This wasn't the only surprise in the quarter. EBITDA was up 22.7% to $22.3 million from $18.2 million, and SG&A expenses were down 120 basis points. Combine this with record sales of $145 million in Q1 and CEO and Founder Gerald Rubin's 18.8% ownership position, and you have a stock that may soon be worth more. (Find out how analysts' estimates affect stock price in Surprising Earnings Results.)

Bottom Line
During the first quarter conference call, Helen of Troy's CEO and CFO both emphasized that they're actively looking for an acquisition. Given the success of OXO, I'm sure management will do a good job finding a company or two that meet its criteria for purchase. With international sales around 23%, something overseas will do the trick.

To learn how to evaluate acquisition targets, read How The Big Boys Buy.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center