Every experienced investor has a stock or two that they have followed seemingly forever but have never actually owned. Houseware and personal care product manufacturer Helen Of Troy (Nasdaq:HELE) is one of those for me. Apart from some issues with executive compensation, I have liked this consolidator and low-cost operator and have often seen it as an undervalued and unduly ignored player in a stable market. And yet, I always seem to manage to find some excuse not to own it at any given time.
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Perhaps now is the time. With fiscal first quarter results in hand, it looks as though the company's core businesses are doing fine but that there is still substantial opportunity to improve the cost structure of the newly-acquired Kaz business and find still more consolidation opportunities.
A Mixed Bag in Fiscal Q1
It will be interesting to see how Wall Street chooses to process and interpret Helen of Troy's fiscal first quarter results. On one hand, the top line was quite strong. Revenue grew by almost 70% on a reported basis, with the company's largest segment (Personal Care) growing more than 9%. Housewares revenue grew more than 10%, while the Healthcare/Home unit saw revenue growth of about 7% on a pro forma basis. Working back through the numbers, it would seem as though underlying organic revenue growth was better than 9% this quarter and the company did surpass the high end of analyst expectations.
Margins were a little more of an issue, however. Gross margin contracted almost five full points this quarter and although the company was efficient with its sales and promotion expense, operating income growth was less than 35% and the operating margin did contract by more than three full points. This was worse than what the analysts had projected; the company may get a pass for now as it is still integrating the Kaz deal, but clearly there is both an opportunity and a necessity to apply some of the company's cost consciousness to this new business.
A Market that Isn't Going Away
Helen of Troy knows its markets and its customers. The company really is not competing with the likes of Shiseido or Estee Lauder (NYSE:EL), but rather Procter & Gamble (NYSE:PG) and Spectrum Brands (NYSE:SPB). Likewise, the company knows that its future is on the shelves at Wal-Mart (NYSE:WMT) and Target (NYSE:TGT), but not Nordstrom (NYSE:JWN) or Whole Foods (NYSE:WFM).
For many years, it seemed like some analysts have denigrated and devalued Helen of Troy for being a company that targets the mass-market value-oriented segment. What exactly is wrong with that? It's a big market, and while it may not be growing gangbusters (and there is certainly fierce price competition), it is an ever-present market. Perhaps people look to trade up and try more expensive products during good times, but there is a huge group of people who need to make the most of their income and who appreciate quality products at reasonable prices.
A Future that Looks A Lot Like the Past
It is hard to see any pressing reasons for Helen of Troy to significantly change its business model. The company has a competitive cost structure and that is crucial in competing with the likes of Colgate (NYSE:CL) and Newell Rubbermaid (NYSE:NWL) in a price-centric market. The company also has critical scale and extensive distribution to all of the major retailers. What that means, then, is that the company can continue to take advantage of selective deals here and there - whether for products or entire businesses - and make money where the prior owners cannot.
The Bottom Line
Helen of Troy has had a good run and has solid institutional support, but relatively little sell-side interest. What's encouraging for shareholders, though, is that the stock is not particularly expensive at these levels. Even allowing for just mid-single digit revenue growth (less than both current and past growth) and minimal free cash flow leverage, the stock should be able to go a fair bit further before reaching fair value.
So here's a company with decent brands, good margins, solid returns on capital, and a stable (and large) addressable market. What's more, it is not especially expensive. While Helen of Troy is not going to appeal to investors looking for the next software or biotech superstar, value and quality growth investors should take a serious look at this company and stock. (For related reading, take a look at 4 Key Factors That Drive The Real Estate Market.)
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