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Helen Of Troy Has A Few Pimples
Helen of Troy (Nasdaq:HELE) is one of those surprisingly volatile stocks that seems much more turbulent than the underlying business would suggest. After all, how much year-to-year volatility should there be in curling irons and cookware? Nevertheless, this is a stock that has given investors numerous trading opportunities over the years.
IN PICTURES: 9 Simple Investing Ratios You Need To Know
The Quarter That Was
The company's fiscal second quarter saw revenue growth of 8%, as the company's houseware business (fueled by the popular OXO brand) grew 10%. In comparison, the personal care business (which is about twice as large) had growth of 7%. Overall, that was a minor miss (about 5%), relative to Wall Street expectations.
Although the top line performance was a bit lacking, the company more than made up for it in expense leverage. Gross margins jumped more than 300 basis points, and adjusted operating income was up 34% from last year. That in turn meant a better than 300 basis point improvement in operating margins, and margins are once again on the higher end of the company's long-term historical range.
The Road Ahead
Unfortunately, the volatility that has characterized this company is going to continue. Management spooked the market by taking guidance down for the next quarter by about 7%, as lower gross margins will take away some of the leverage seen in this quarter.
Looking back, this volatility is an issue that perhaps ought to concern long-term shareholders. Over the past 10 years, operating margins have swung as low as 8.5% and as high as 19.4%. Sales growth has been more consistent (helped, in part, by acquisitions), but the net result has been jumpy earnings and a roller coaster stock chart. This is not exactly endemic to personal care; larger companies like Procter & Gamble (NYSE:PG) and even oft-restructuring Unilever (NYSE:UL) have been more consistent performers, as has Church & Dwight (NYSE:CHD).
What makes this even more galling is that Helen of Troy pays its CEO handsomely for this erratic performance. According to the proxy statement, the CEO can get a bonus of 5-10% of the company's annual earnings (in addition to a company car) - that has led to payouts of more than $5 million in two of the last three years, and that's not counting options.
In contrast, P&G's CEO made $4.2 million last year, Unilever's made $4.3 million, and Colgate-Palmolive (NYSE:CL) paid $4.6 million in salary and incentive compensation. Now, to be fair, these large-company CEOs earn much more in options, stock awards, and other programs (Colgate, for instance, paid $17 million in total to its CEO, and P&G paid $13 million in total), but should a company with less than $1 billion in sales even be in the same ballpark as companies with more than 50 times the revenue? If Helen of Troy were a consistent performer, the argument might be different, but shareholders are paying a lot for erratic performance. (For more, see A Guide To Investing In Consumer Staples)
The Bottom Line
Complaints about excess compensation aside, Helen of Troy pursues a sound strategy. The company seems to know its niches, and recent acquisitions (Pert Plus, Sure, and Infusium 23) make a lot of sense, as did the large purchase of OXO years ago. On top of that, HELE stands up well in terms of returns on assets and invested capital and should have further margin upside.
The company's erratic performance does up the risk a bit, but this does not look like an expensive stock. At worst, it should probably give market-matching returns over the next three years and could do considerably better with more sustained performance in margins and capital utilization. (For more, see Helen Of Troy's Winning Acquisitions)
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IN PICTURES: 9 Simple Investing Ratios You Need To Know
The Quarter That Was
The company's fiscal second quarter saw revenue growth of 8%, as the company's houseware business (fueled by the popular OXO brand) grew 10%. In comparison, the personal care business (which is about twice as large) had growth of 7%. Overall, that was a minor miss (about 5%), relative to Wall Street expectations.
Although the top line performance was a bit lacking, the company more than made up for it in expense leverage. Gross margins jumped more than 300 basis points, and adjusted operating income was up 34% from last year. That in turn meant a better than 300 basis point improvement in operating margins, and margins are once again on the higher end of the company's long-term historical range.
The Road Ahead
Unfortunately, the volatility that has characterized this company is going to continue. Management spooked the market by taking guidance down for the next quarter by about 7%, as lower gross margins will take away some of the leverage seen in this quarter.
What makes this even more galling is that Helen of Troy pays its CEO handsomely for this erratic performance. According to the proxy statement, the CEO can get a bonus of 5-10% of the company's annual earnings (in addition to a company car) - that has led to payouts of more than $5 million in two of the last three years, and that's not counting options.
In contrast, P&G's CEO made $4.2 million last year, Unilever's made $4.3 million, and Colgate-Palmolive (NYSE:CL) paid $4.6 million in salary and incentive compensation. Now, to be fair, these large-company CEOs earn much more in options, stock awards, and other programs (Colgate, for instance, paid $17 million in total to its CEO, and P&G paid $13 million in total), but should a company with less than $1 billion in sales even be in the same ballpark as companies with more than 50 times the revenue? If Helen of Troy were a consistent performer, the argument might be different, but shareholders are paying a lot for erratic performance. (For more, see A Guide To Investing In Consumer Staples)
The Bottom Line
Complaints about excess compensation aside, Helen of Troy pursues a sound strategy. The company seems to know its niches, and recent acquisitions (Pert Plus, Sure, and Infusium 23) make a lot of sense, as did the large purchase of OXO years ago. On top of that, HELE stands up well in terms of returns on assets and invested capital and should have further margin upside.
The company's erratic performance does up the risk a bit, but this does not look like an expensive stock. At worst, it should probably give market-matching returns over the next three years and could do considerably better with more sustained performance in margins and capital utilization. (For more, see Helen Of Troy's Winning Acquisitions)
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by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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