Hydroflask Parent Co Reports Fourth Quarter Fiscal 2020 Results

Helen of Troy Limited (NASDAQ: HELE), designer, developer and worldwide marketer of consumer brand-name housewares, health and home, and beauty products, today reported results for the three-month period ended February 29, 2020.

• GAAP Consolidated Net Sales Growth of 14.9%; Organic Business Net Sales Growth of 13.4%
• Diluted Loss Per Share from Continuing Operations of $0.13; Includes Impairment of $1.43
• Adjusted Diluted Earnings per Share from Continuing Operations Growth of 3.3% to $1.88
• Fiscal 2020 Consolidated Net Sales Growth of 9.2%
• Fiscal 2020 GAAP Diluted Earnings per Share from Continuing Operations of $6.02
• Fiscal 2020 Adjusted Diluted EPS from Continuing Operations Growth of 15.4% to $9.30
• Fiscal 2020 Free Cash Flow Growth of 45.6%
• Designates Mass Market Personal Care Business as Held for Sale
• Defers Initiation of Fiscal 2021 Outlook Due to Uncertainty from COVID-19 Pandemic

Consistent with its strategy of focusing its resources on its Leadership Brands, during the fourth quarter of fiscal 2020, the Company committed to a plan to divest certain assets within its mass market personal care business (Personal Care) and recorded an after-tax non-cash asset impairment charge of $36.4 million related to its goodwill and intangible assets. The assets to be divested include intangible assets, inventory and fixed assets related to the Company's mass channel liquids, powder and aerosol products under brands such as Pert, Brut, Sure and Infusium. The Company expects the divestiture to occur within fiscal 2021. Accordingly, the Company has classified the identified assets of the disposal group as held for sale.

In conjunction with this change, the Company now defines Core as strategic business that it expects to be an ongoing part of its operations, and Non-Core as business that it expects to divest within a year of its designation as Non-Core. Previously referred to as Core business, Organic business now refers to net sales revenue associated with product lines or brands after the first twelve months from the date the product line or brand is acquired, excluding the impact that foreign currency re-measurement had on reported net sales.

Executive Summary – Fourth Quarter of Fiscal 2020

• Consolidated net sales revenue increase of 14.9%, including:
  • An increase in Leadership Brand net sales of 15.7%
  • An increase in online channel net sales of approximately 39%
  • Organic business growth of 13.4%
  • Core business growth of 16.0%

• GAAP operating loss of $2.7 million, or 0.6% of net sales, which includes non-cash asset impairment charges of $41.0 million, acquisition-related expenses of $1.1 million and restructuring charges of $2.3 million, compared to GAAP operating income of $44.1 million, or 11.5% of net sales, for the same period last year, which included restructuring charges of $1.0 million

• Non-GAAP adjusted operating income increase of 0.8% to $53.9 million, or 12.2% of net sales, compared to $53.5 million, or 13.9% of net sales, for the same period last year

• GAAP diluted loss per share from continuing operations of $0.13, which includes acquisition-related expenses of $0.04 per share, non-cash asset impairment charges of $1.43 per share, and restructuring charges of $0.08 per share, compared to GAAP diluted earnings per share ("EPS") of $1.47 for the same period last year, which included restructuring charges of $0.04 per share

• Non-GAAP adjusted diluted EPS from continuing operations increase of 3.3% to $1.88, compared to $1.82 for the same period last year

Executive Summary - Fiscal 2020

• Consolidated net sales revenue increase of 9.2% including:
  • An increase in Leadership Brand net sales of 9.4%
  • An increase in online channel net sales of approximately 34%
  • Organic business growth of 9.2%
  • Core business growth of 9.9%

• GAAP operating income of $178.3 million, or 10.4% of net sales, which includes non-cash asset impairment charges of $41.0 million, acquisition-related expenses of $2.5 million, and restructuring charges of $3.3 million compared to GAAP operating income of $199.4 million, or 12.7% of net sales, for the same period last year, which included restructuring charges of $3.6 million

• Non-GAAP adjusted operating income increase of 12.6% to $269.3 million, or 15.8% of net sales, compared to $239.2 million, or 15.3% of net sales, for the same period last year

• GAAP diluted EPS from continuing operations of $6.02, which includes acquisition-related expenses of $0.10 per share, non-cash asset impairment charges of $1.44 per share, and restructuring charges of $0.12 per share compared to GAAP diluted EPS of $6.62 for the same period last year, which included restructuring charges of $0.13 per share

• Non-GAAP adjusted diluted EPS from continuing operations growth of 15.4% to $9.30 compared to $8.06

• Net cash provided by operating activities from continuing operations growth of 35.3% to $271.3 million, compared to $200.6 million

• Free cash flow growth of 45.6% to $253.5 million, compared to $174.2 million

Julien R. Mininberg, Chief Executive Officer, stated: “The fourth quarter was extremely strong, capping the best year in Helen of Troy’s history by almost any measure. For the quarter, we delivered net sales growth of 14.9%. Our Leadership Brands led the way, growing 15.7%, and we continued to make major gains online, growing that channel 39% to now represent 24% of total sales. All three of our business segments grew double digit in the quarter and we leaned into our flywheel with key new product, marketing and sustainability programs. On an adjusted basis, EPS for the quarter grew 3.3% against a strong year-ago comparison. For the full fiscal year 2020 net sales grew 9.2%, adjusted EPS grew 15.4%, adjusted operating margin expanded by 50 basis points, and we increased our free cash flow significantly. We are delighted by the acceleration of our flywheel in fiscal year 2020 on top of the strength posted in fiscal 2019 and 2018 and the outstanding first year of Phase II of Helen of Troy’s Transformation.”

“Our heartfelt thoughts are with people around the globe as the COVID-19 pandemic has quickly reshaped nearly every aspect of life. As COVID-19 spread, Helen of Troy moved quickly and decisively to help ensure the safety and health of our associates around the world, and the communities where we operate. We were equally decisive on actions to help improve liquidity and reduce the impact on cash flow. Even amidst the crisis, we remain focused on our strategic plans and the long-term interests of our shareholders. With the resumption of more normalized retail, consumer, and economic activity unknown, we are now holding cash and cash equivalents of close to $400 million and have taken difficult but necessary steps to temporarily reduce our personnel costs and discretionary spending. We believe acting now, and with an approach of shared sacrifice, best serves our goal to mitigate a portion of the business impact of the coronavirus while preserving the high-performance organization, systems, and brands we have worked so hard to build and maintain. I could not be prouder of how our global teams have adapted in order to maintain the health of our business and support our consumers and customers, while also taking care of themselves and their families.”

Mr. Mininberg concluded: “As we look to the future, we are seeing positive sales trends in key Helen of Troy brands after the initial shock of lock down in early March. Our Braun, Vicks, PUR and Honeywell products are supporting consumer health at a time of extreme need, and our OXO products are providing convenience, comfort and solutions as families spend unprecedented amounts of time at home. We are working around the clock to meet as much of the ongoing demand for thermometers, humidifiers, air purifiers and water purifiers as possible. We are also working with suppliers and retailers to provide consumers with OXO kitchen, cleaning and storage products, as well as volumizers in Beauty, where demand is high in channels that are open. While encouraging, we do expect to see a net adverse impact to our results for the first quarter and full year fiscal 2021. Although still very early, we are making plans to continue selectively investing in the key Phase II initiatives once the economic situation allows. With our diversified portfolio of leading, trusted brands, a strong balance sheet with low net leverage, and a corporate culture driven to rise to the challenge, we believe Helen of Troy is well positioned to navigate the current unprecedented situation and emerge strong.”

Consolidated Operating Results - Fourth Quarter Fiscal 2020 Compared to Fourth Quarter Fiscal 2019

• Consolidated net sales revenue increased 14.9% to $442.4 million compared to $384.8 million, driven by an Organic business increase of $51.7 million, or 13.4%, and growth from the acquisition of Drybar Products of $6.0 million, or 1.6%. The Organic business increase primarily reflects growth in both online and brick and mortar appliance sales in the Beauty segment, higher sales across core channels in the Housewares segment, and increased demand driven growth in the Health & Home segment, particularly in thermometry, related to higher pediatric fever and the impact of COVID-19 late in the quarter. These factors were partially offset by a decline in Non-Core business (Personal Care) sales within the Beauty segment.

• Consolidated gross profit margin increased 2.6 percentage points to 43.5%, compared to 40.9%. The increase is primarily due to a more favorable product mix within all three business segments and a lower mix of shipments made on a direct import basis. These factors were partially offset by a lower mix of Personal Care sales in the Beauty segment.

• Consolidated SG&A as a percentage of sales increased by 5.2 percentage points to 34.4% of net sales compared to 29.2%. The increase is primarily due to higher advertising and new product development expense, higher royalty expense, an increase in amortization expense, and higher performance-based annual incentive compensation expense. These factors were partially offset by lower share-based compensation expense.

• Consolidated operating loss was $2.7 million, or 0.6% of net sales, compared to operating income of $44.1 million, or 11.5% of net sales. The decline in consolidated operating margin is primarily due to $41.0 million of non-cash asset impairment charges, higher advertising and new product development expense, acquisition-related expenses, higher restructuring charges, higher royalty expense, an increase in amortization expense, and higher performance-based annual incentive compensation expense. These factors were partially offset by a more favorable product mix, lower share-based compensation expense, and increased operating leverage from sales growth.

• Income tax benefit as a percentage of pre-tax loss was 48.1%, compared to income tax expense as a percentage of pre-tax income of 7.9% for the same period last year. The year-over-year change is primarily due to the recognition of a tax benefit from impairment charges recorded in the fourth quarter of fiscal 2020.

• Loss from continuing operations was $3.2 million, or $0.13 per diluted share, compared to income from continuing operations of $37.7 million, or $1.47 per diluted share. Fiscal 2020 includes after-tax non-cash asset impairment charges, restructuring charges, and acquisition-related expenses totaling $1.55 per share, compared to a total of $0.04 per share in after-tax restructuring charges in the same period last year.

• There was no income or loss from discontinued operations, compared to a loss of $0.4 million, or $0.02 per diluted share, for the same period last year.

• Adjusted EBITDA increased 1.2% to $58.4 million compared to $57.7 million.

On an adjusted basis for the fourth quarters of fiscal 2020 and 2019, excluding asset impairment charges, acquisition-related expenses, restructuring charges, amortization of intangible assets, and non-cash share-based compensation, as applicable:

• Adjusted operating income increased $0.4 million, or 0.8%, to $53.9 million, or 12.2% of net sales, compared to $53.5 million, or 13.9% of net sales. The 1.7 percentage point decrease in adjusted operating margin primarily reflects higher advertising and new product development expense, higher performance-based annual incentive compensation expense, and an increase in royalty expense. These factors were partially offset by a more favorable product mix and increased operating leverage from sales growth.

• Adjusted income from continuing operations increased $1.3 million, or 2.7%, to $47.8 million, or $1.88 per diluted share, compared to $46.6 million, or $1.82 per diluted share. The 3.3% increase in adjusted diluted EPS from continuing operations was primarily due to higher adjusted operating income and the impact of lower weighted average diluted shares outstanding, partially offset by higher interest expense.

Segment Operating Results - Fourth Quarter Fiscal 2020 Compared to Fourth Quarter Fiscal 2019

Housewares net sales increased 15.0%, or $18.9 million, primarily due to point of sale growth with existing domestic brick and mortar customers, an increase in online sales, and revenue from new product introductions. These factors were partially offset by lower club channel sales, a decline in international sales, and lower closeout channel sales. Operating income decreased 31.5% to $14.0 million, or 9.6% of segment net sales, compared to $20.4 million, or 16.2% of segment net sales in the same period last year. The 6.6 percentage point decrease was primarily due to higher advertising and new product development expense to support strategic initiatives, higher freight and distribution expense to support increased retail customer shipments, and higher restructuring charges. These factors were partially offset by the impact of a more favorable product mix and increased operating leverage from sales growth. Adjusted operating income decreased 24.8% to $17.1 million, or 11.8% of segment net sales, compared to $22.8 million, or 18.1% of segment net sales.

Health & Home net sales increased 10.5%, primarily due to new product introductions and increased demand, particularly in thermometry, related to higher pediatric fever and the impact of COVID-19 toward the end of the fourth quarter. These factors were partially offset by lower sales due to net distribution changes year-over-year and the unfavorable impact of net foreign currency fluctuations of $0.5 million, or 0.3%. Operating income increased 2.4% to $16.3 million, or 8.8% of segment net sales, compared to $15.9 million, or 9.5% of segment net sales, in the same period last year. The 0.7 percentage point decrease in operating margin was primarily due to higher royalty expense and higher new product development expense. These factors were partially offset by the margin impact of a more favorable product mix and increased operating leverage from sales growth. Adjusted operating income decreased 2.3% to $20.8 million, or 11.2% of segment net sales, compared to $21.2 million, or 12.6% of segment net sales in the same period last year.

Beauty net sales increased 23.1%, or $20.9 million, primarily due to an Organic business increase of 16.1% and 6.7% of growth from the acquisition of Drybar Products. The Organic business increase primarily reflects growth in both online and brick and mortar channel sales in the appliance category. These factors were partially offset by a decline in Personal Care. Operating loss was $33.0 million, or 29.6% of segment net sales compared to operating income of $7.8 million, or 8.6% of segment net sales, in the same period last year. The operating loss in the fourth quarter of fiscal 2020 primarily reflects the impact of non-cash asset impairment charges of $41.0 million, higher amortization expense, and an increase in advertising and new product development expense. These factors were partially offset by the margin impact of a more favorable product mix, increased operating leverage from sales growth and lower freight expense. Adjusted operating income increased 69.5% to $16.0 million, or 14.4% of segment net sales, compared to $9.4 million, or 10.4% of segment net sales in the same period last year.

Balance Sheet and Cash Flow Highlights - Fiscal 2020 Compared to Fiscal 2019

• Cash and cash equivalents totaled $24.5 million, compared to $11.9 million.

• Total short- and long-term debt was $339.3 million, compared to $320.8 million, a net increase of $18.5 million.

• Accounts receivable turnover for fiscal 2020 was 67.0 days, compared to 68.3 days for the same period last year.

• Inventory was $256.3 million, compared to $302.3 million. Inventory turnover for fiscal 2020 was 3.0 times, compared to 3.3 times for the same period last year.

• Net cash provided by operating activities from continuing operations for fiscal 2020 increased $70.7 million to $271.3 million. The increase was primarily driven by higher cash earnings, and a decrease in cash used for inventory. These factors were partially offset by an increase in cash used for receivables.

Subsequent Events

On March 13, 2020, the President of the United States announced a National Emergency relating to COVID-19. Since then, there has been widespread infection in the U.S. and abroad, with the potential for catastrophic impact. As a result of these and other effects, the Company expects COVID-19 to adversely impact its business, which could be material. The impact includes the effect of temporary closures of, and limited hours of operation and materially lower store traffic at, customer stores. The COVID-19 pandemic is also impacting its third-party manufacturers, most of which are located in the Far East, principally China. The extent of the impact of COVID-19 on the business and financial results will depend largely on future developments, including the duration of the spread of the COVID-19 outbreak within the U.S. and globally, the impact on capital and financial markets and the related impact on consumer confidence and spending. These future developments are outside of the Company's control, are highly uncertain and cannot be predicted. If the impact is prolonged, then it can further increase the difficulty of planning for operations. These and other potential impacts of the current public health crisis could therefore materially and adversely affect the business, financial condition, cash flows and results of operations.

Due to the impacts of COVID-19, the Company is experiencing favorable demand trends for some of its products, while others are being adversely impacted due to retail store closures and consumer uncertainty. At the end of fiscal 2020, the Company began to experience increased demand for certain products in the Health & Home segment, particularly thermometers. This trend continued into the beginning of fiscal 2021 and became more pronounced in other product categories such as humidification, water purification and air purification. Additionally, at the beginning of fiscal 2021, the Company began to experience favorable demand trends for OXO products within the Housewares segment as consumers engage in pantry stocking, cleaning, nesting and cooking at home. Products that are more discretionary in nature or more dependent on the retail brick and mortar channel are generally experiencing unfavorable demand trends. All products are being adversely impacted by the effect of temporary closures of, and limited hours of operation and materially lower store traffic at, customer stores. The Company is also experiencing supply chain disruptions with some third-party manufacturers, which is adversely affecting its ability to meet consumer demand in product categories where it is strong. Accordingly, the Company expects that the net effect of COVID-19 will adversely impact its results for the first quarter of fiscal 2021, as well as the full fiscal 2021, and that impact could be material. This situation is changing rapidly, and additional impacts may arise that we are not currently aware of.

On March 13, 2020, the Company entered into a Third Amendment and Commitment Increase (the "Amendment") to its Amended and Restated Credit Agreement (as amended, the "Credit Agreement"). The Amendment extended the maturity of the commitment under the Credit Agreement from December 7, 2021 to March 13, 2025. Further, the Amendment increased the unsecured revolving commitment from $1.0 billion to $1.25 billion.

On March 24, 2020, the Company borrowed approximately $200 million under the Credit Agreement as part of a comprehensive precautionary approach to increase its cash position and maximize its financial flexibility in light of the volatility in the global markets resulting from the COVID-19 outbreak. After giving effect to the borrowing, the remaining amount available for borrowings under the Credit Agreement was $536.4 million and the Company's cash and cash equivalents on hand was approximately $393.0 million. Covenants in the Company's debt agreements can limit the amount of indebtedness it can incur. The Company may repay amounts borrowed at any time without penalty.

Fiscal 2021 Business Update

Due to the evolving COVID-19 pandemic and the related business uncertainty, the Company is not providing an Outlook for fiscal 2021 at this time. In order to reduce costs and preserve cash flow, the Company has implemented a number of measures that will remain in place until there is greater certainty, a reopening of retail customer brick and mortar stores and improved consumer demand, which include the following:

• A graduated salary reduction for all associates, including named executive officers and the other members of the Company’s executive leadership team;
• A reduction in the cash compensation of the Company's Board of Directors;
• Suspension of merit increases, promotions and new associate hiring until further notice;
• The furlough of associates in specific areas directly tied to sales volume, with assistance to maintain health insurance coverage, as well as a reduction of external temporary labor and reduced work hours;
• Reduction or deferral of marketing expense. The Company will lean into brands with strong current demand and reduce investment in other key brands without sacrificing brand awareness;
• Limited reduction of investment in new product development and launches, in anticipation of more normalized economic activity;
• Elimination of travel expense in the short term, with a significant reduction planned for the second half of fiscal 2021; and
• Reduction of consulting fees and capital expenditures for projects that are not critical.

Conference Call and Webcast

The Company will conduct a teleconference in conjunction with today’s earnings release. The teleconference begins at 4:45 p.m. Eastern Time today, Tuesday, April 28, 2020. Investors and analysts interested in participating in the call are invited to dial (877) 407-3982 approximately ten minutes prior to the start of the call. The conference call will also be webcast live at: http://investor.helenoftroy.com/. A telephone replay of this call will be available at 7:45 p.m. Eastern Time on April 28, 2020 until 11:59 p.m. Eastern Time on May 5, 2020 and can be accessed by dialing (844) 512-2921 and entering replay pin number 13700166. A replay of the webcast will remain available on the website for one year.

Non-GAAP Financial Measures

The Company reports and discusses its operating results using financial measures consistent with accounting principles generally accepted in the United States of America (“GAAP”). To supplement its presentation, the Company discloses certain financial measures that may be considered non-GAAP such as adjusted operating income, adjusted operating margin, adjusted income from continuing operations, adjusted diluted earnings per share (“EPS”) from continuing operations, Core and Non-Core adjusted diluted EPS from continuing operations, EBITDA, adjusted EBITDA, and free cash flow, which are presented in accompanying tables to this press release along with a reconciliation of these financial measures to their corresponding GAAP-based measures presented in the Company’s condensed consolidated statements of income and cash flow. All references to the Company's continuing operations exclude the Nutritional Supplements segment. For additional information see Note 1 to the accompanying tables to this Press Release.