Helen Of Troy Needs To Exploit Distracted Competitors

By Stephen D. Simpson, CFA | January 14, 2013 AAA

Acquisitions can obviously expand a company's operations, but even growth-by-acquisition stories ultimately come down to a company's ability to execute. Helen Of Troy (Nasdaq:HELE) has always been a willing (and aggressive) acquirer, and that has allowed management to build the company into a diversified collection of well-known home and personal care brands. The question now, however, is whether this company can take advantage of the rampant restructurings among its larger rivals to widen its niche and gain market share.

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So-So Performance in Fiscal Third Quarter
While Helen of Troy's management bragged about the company's record revenue and profits in the fiscal third quarter, discerning investors knew to look through the hype and hyperbole. To that end, Helen of Troy showed some progress this quarter, but there's still much left for management to do (or do better).

Revenue was up nearly 11% as reported, but a large chunk of that growth was bought and paid for by the company; organic revenue growth was only about 2%. While that 2% growth is an improvement (Q2 sales were down 6% organically), I'm a little disappointed by the sluggish performance in personal care.

Margins were a mixed bag as well. While gross margin did improve a bit (about 30 basis points) from last year, it was down more than a point sequentially. On the other hand, operating income rose more than 12%, and the company did see nearly two points of sequential operating margin improvement.

Why Can't Helen of Troy Grab More Business?
I'm a little frustrated by the results that the company delivered this quarter. The performance in housewares (up 11%) was very solid, and the company has brands such as OXO running smoothly, so there are no real worries there.

The other two business segments are a different matter. The personal care business saw revenue down slightly, and while the company blamed the consumer retail environment (in part) for this decline, I have some trouble with that. First of all, Helen of Troy's products are, by and large, competitively priced relative to many of the offerings of Unilever (NYSE:UL), Newell Rubbermaid (NYSE:NWL), Procter & Gamble (NYSE:PG) and Church & Dwight (NYSE:CHD), so I don't see why the company shouldn't see some benefit. What's more, many companies in this sector (like P&G) are retrenching and losing share in the Nielsen data, and I'm concerned that Helen of Troy isn't exploiting that.

Likewise in the health care/home segment. While reported revenue was up 23% on the PUR deal, underlying revenue was up less than 1%. In its 10-Q, the company blamed some of the same overall retail factors, but it also mentioned "loss of shelf placement on certain key products due to competitive pricing pressures." I wonder if that refers to Clorox (NYSE:CLX) (in the water filtration business) or one of the competitors to the Honeywell-branded home/health products, or something else entirely. In any case, aggressive price competition is one thing that Helen of Troy is not especially well-structured to surmount, so this is worth watching.

The Bottom Line
Although this summary has been pretty negative, I'm actually a fan of Helen of Troy on balance. While the company's heavy exposure to China is a risk to its cost of goods, I like that the company has moved aggressively to acquire well-known brands. Integration of its recent large deals should lead to better margins in coming years. That said, the recent trend in organic revenue is reason to pause regarding the company's ability to deliver differentiated growth from its broader end markets.

I continue to believe that Helen of Troy can deliver free cash flow growth in the high single-digits over the long term. At present, however, the Street is already in tune with that potential, and the current mid-$30 range stock price doesn't leave abundant upside to what I see as a fair value in the high $30 range. This is a good stock to include on a watch list, but I'd be in no great hurry to buy today unless you have a strong conviction that the company will drive significantly better organic revenue growth in the next few quarters.

At the time of writing, Stephen D. Simpson did not own shares in any company mentioned in this article.

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