Hydro Flask Helps Parent Co. To 12.5% Sales Gain

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 28, 2018. Following the divestiture of Healthy Directions on December 20, 2017, the Company no longer consolidates the Nutritional Supplements segment's operating results. The former segment's operating results are included in the Company's financial statements and classified as discontinued operations for all periods presented.

Executive Summary - Fourth Quarter of Fiscal 2018

• Consolidated net sales revenue increase of 12.5%, including:
• An increase in Leadership Brand net sales of approximately 16.0%
• An increase in online channel net sales of approximately 28.0%
• Core business growth of 11.3%
• GAAP operating income of $31.4 million, or 8.0% of net sales, which includes $11.4 million in pre-tax non-cash asset impairment charges and $0.7 million in restructuring charges, compared to $41.5 million, or 11.9% of net sales, which includes $0.5 million in pre-tax non-cash impairment charges, in the same period last year
• Non-GAAP adjusted operating income growth of 4.2% to $52.7 million, or 13.5% of net sales, compared to $50.5 million, or 14.5% of net sales in the same period last year
• One-time provisional charge of $17.9 million related to recently-passed U.S. tax reform
• GAAP diluted EPS from continuing operations of $0.31, which includes a total of $1.07 per share in tax reform, impairment and restructuring charges, compared to GAAP diluted EPS from continuing operations of $1.25 in the same period last year, which includes $0.02 per share in impairment charges
• Non-GAAP adjusted diluted EPS from continuing operations growth of 9.0% to $1.69, compared to $1.55 in the same period last year
• Repurchased 409,121 shares of common stock in the open market during the quarter for $36.9 million

Executive Summary - Fiscal 2018

Consolidated net sales revenue growth of 5.9%, including:

• An increase in Leadership Brand net sales of approximately 9.5%
• An increase in online channel net sales of approximately 32.5%
• Core business growth of 5.1%
• GAAP operating income of $169.1 million, or 11.3% of net sales, which includes $15.4 million in pre-tax non-cash asset impairment charges, $1.9 million in restructuring charges and a $3.6 million charge related to the bankruptcy of Toys ‘R' Us (TRU), compared to $169.7 million, or 12.1% of net sales, which includes $2.9 million in pre-tax non-cash impairment charges and a patent litigation charge of $1.5 million, in the same period last year
• Non-GAAP adjusted operating income growth of 6.6% to $223.9 million, or 15.0% of net sales, compared to $209.9 million, or 14.9% of net sales in the same period last year
• One-time provisional charge of $17.9 million related to recently-passed U.S. tax reform
• GAAP diluted EPS from continuing operations of $4.73, which includes a total of $1.36 per share in tax reform, impairment, TRU bankruptcy and restructuring charges, compared to GAAP diluted EPS from continuing operations of $5.17 in the same period last year, which includes a total of $0.14 per share in impairment and patent litigation charges
• Non-GAAP adjusted diluted EPS from continuing operations growth of 11.6% to $7.24, compared to $6.49 in the same period last year
• Net cash provided by operating activities of $218.6 million and free cash flow of $205.0 million, which represents a yield of 8.9%, based on our current market capitalization
• Repaid $197.0 million of debt and repurchased $65.8 million of common stock

Julien R. Mininberg, Chief Executive Officer, stated: "I am very pleased with our results in the fourth quarter, which rounded out a particularly strong fiscal year performance, marking our fourth consecutive year of executing well against our transformational strategy. During the fourth quarter, we delivered a strong 12.5% increase in consolidated net sales and adjusted diluted EPS from continuing operations growth of 9%, both above our expectations. Better than expected momentum from all three of our business segments helped us achieve a 16% increase in our Leadership Brands' net sales and a 28% increase in online channel net sales. Our Health & Home segment experienced one of its strongest quarters in years, with sales up 19.4% as our products provided comfort and relief to families around the world during a particularly severe, global cough, cold and flu season and periods of unseasonably cold weather. Our Housewares segment also demonstrated excellent growth, with sales up 13.4% and strength across both brands, online, and in brick and mortar. Sales in our Beauty segment had a less than expected decline of 2.1%, with solid growth in the online channel, partially offsetting a decline in brick and mortar.

"For the fiscal year we grew net sales 5.9%, increased adjusted diluted EPS from continuing operations by 11.6%, and generated a free cash flow yield of 8.9%, based on our current market capitalization. We improved our return on invested capital with strong income growth and the divestiture of Healthy Directions. Adhering to our strategies, we invested in our core to grow our Leadership Brands, made further efficiency gains in our shared services, initiated Project Refuel to streamline the business, opportunistically repurchased stock and paid down debt."

Mr. Mininberg continued: "Just four years ago we began our transformation by focusing on strategies to unlock additional shareholder value. Since then, on a continuing operations basis, we increased sales at a 3.1% CAGR, expanded adjusted operating margin by 1.1 percentage points, improved asset efficiency, increased free cash flow at a 15.9% CAGR, and grew adjusted diluted EPS at a 12.6% CAGR, while making incremental investments in the long-term health of our Leadership Brands. I am very proud of these results and of our outstanding employees all around the world who have worked tirelessly to achieve them. As I look to fiscal 2019, we are pleased to provide an outlook that reflects continued top and bottom line growth on top of a strong fiscal 2018, even as our industry faces challenges including rising commodity costs and a fast-changing retail landscape. I am very excited about our future prospects. Helen of Troy has become an organization that is even more capable of winning with digital marketing, adapting to change in our channels, and improving our operations and other shared services to capitalize on future growth opportunities. Our enhanced infrastructure is ready to add new businesses and operate all our segments with greater efficiencies."                                                            

Consolidated Operating Results - Fourth Quarter Fiscal 2018 Compared to Fourth Quarter Fiscal 2017

Consolidated net sales revenue increased 12.5% to $390.8 million compared to $347.4 million, which includes an increase of 1.2% from foreign currency fluctuations. The net sales increase also includes the contribution from new product introductions, online customer growth, incremental distribution, and growth in international sales.

Consolidated gross profit margin decreased 0.3 percentage points to 41.3% compared to 41.6%. The decrease in consolidated gross profit margin is primarily due to an increase in promotional programs and unfavorable channel mix, partially offset by favorable product mix, growth in the Company's Leadership Brands and the favorable impact from foreign currency fluctuations.

Consolidated SG&A as a percentage of sales increased by 0.6 percentage points to 30.1% of net sales compared to 29.5%. The increase is primarily due to higher incentive compensation expense, the unfavorable comparative impact of foreign currency exchange and forward contract settlements, and higher advertising and new product development expense. These factors were partially offset by improved distribution efficiency, lower outbound freight costs, and the impact that higher overall net sales had on operating leverage.

Operating income was $31.4 million, or 8.0% of net sales, compared to $41.5 million, or 11.9% of net sales, in the same period last year. Operating income includes pre-tax non-cash asset impairment charges of $11.4 million and pre-tax restructuring charges of $0.7 million, compared to pre-tax non-cash asset impairment charges of $0.5 million in the same period last year. These items unfavorably impacted the year-over-year comparison of operating margin by 3.0 percentage points. The remaining decrease in consolidated operating margin primarily reflects the decline in gross profit margin, higher incentive compensation expense, the unfavorable comparative impact of foreign currency exchange and forward contract settlements, and higher advertising and new product development expense. These decreases were partially offset by a higher mix of Leadership Brand sales at a higher operating margin, improved distribution efficiency, lower outbound freight costs, and the impact that higher overall net sales had on operating leverage.

Income tax expense as a percentage of pre-tax income was 70.6%, compared to income tax expense of 9.3% for the same period last year. The increase in the Company's tax rate is primarily due to a one-time provisional charge of $17.9 million related to recently-passed U.S. tax reform, which increased the effective tax rate by 62.9 percentage points.

Income from continuing operations was $8.4 million, or $0.31 per diluted share on 27.1 million weighted average shares outstanding, compared to $34.4 million, or $1.25 per diluted share on 27.6 million weighted average diluted shares outstanding. Income from continuing operations for the fourth quarter of fiscal 2018 includes after-tax non-cash asset impairment charges of $10.3 million ($0.38 per share), a one-time tax reform charge of $17.9 million ($0.66 per share), and after-tax restructuring charges of $0.7 million ($0.03 per share). This compares to after tax non-cash asset impairment charges of $0.4 million ($0.02 per share) in the same period last year.

Income from discontinued operations, net of tax, was $51.7 million, compared to $1.3 million in the same period last year. Diluted EPS from discontinued operations was $1.91 compared to $0.05 in the same period last year. Fourth quarter fiscal 2018 income from discontinued operations includes a tax benefit of $49.2 million related to non-cash asset impairment charges.

Adjusted EBITDA (EBITDA excluding non-cash asset impairment charges, restructuring charges, and non‐cash share based compensation, as applicable) increased 4.1% to $56.6 million compared to $54.4 million.

On an adjusted basis for the fourth quarters of fiscal 2018 and 2017, excluding non-cash asset impairment charges, restructuring charges, the one-time tax reform charge, non‐cash share based compensation, and non-cash amortization of intangible assets, as applicable:

Adjusted operating income was $52.7 million, or 13.5% of net sales, compared to $50.5 million, or 14.5% of net sales. The 1.0 percentage point decrease in adjusted operating margin primarily reflects the decline in gross profit margin, higher incentive compensation expense, the unfavorable comparative impact of foreign currency exchange and forward contract settlements, and higher advertising and new product development expense. These decreases were partially offset by a higher mix of Leadership Brand sales at a higher operating margin, improved distribution efficiency, lower outbound freight costs, and the impact that higher overall net sales had on operating leverage.

Adjusted income from continuing operations was $45.7 million, or $1.69 per diluted share, compared to $42.7 million, or $1.55 per diluted share. The 9.0% increase in adjusted diluted EPS from continuing operations primarily reflects the impact of higher adjusted operating income, lower interest expense, and lower weighted average diluted shares outstanding year-over-year.

Segment Operating Results - Fourth Quarter Fiscal 2018 Compared to Fourth Quarter Fiscal 2017

Housewares net sales increased by 13.4% reflecting an increase in online channel sales, incremental distribution with existing customers, expanded domestic distribution, international growth, and new product introductions for both Hydro Flask and OXO brands. This growth was partially offset by the unfavorable comparative impact of strong sales into the club channel in the same period last year. Segment net sales also benefitted from the favorable impact of net foreign currency fluctuations of approximately $0.4 million, or 0.4%. GAAP operating margin was 15.6% compared to 20.0%. The decrease in operating margin is primarily due to an increase in promotional programs, unfavorable channel mix, higher marketing and new product development expense, higher personnel costs, and restructuring charges of $0.2 million.

Health & Home net sales increased 19.4% reflecting growth in online channel sales, expanded international distribution, and incremental distribution with existing customers. Sales were favorably impacted by unseasonably cold fall and winter weather, and significantly higher cough/cold/flu incidence compared to the same period last year. Segment net sales also benefitted from the favorable impact of net foreign currency fluctuations of approximately $2.8 million, or 1.7%. GAAP operating margin was 6.6% compared to 7.9%. The decrease in operating margin reflects higher advertising expense, higher incentive compensation expense, an increase in product liability expense, and the unfavorable comparative impact of foreign currency exchange and forward contract settlements. The decrease was partially offset by improved distribution efficiency, lower outbound freight costs, increased operating leverage from net sales growth, and the favorable impact of net foreign currency fluctuations on net sales.

Beauty net sales decreased 2.1% primarily reflecting a decline in brick and mortar, which offset solid growth in the online channel. Segment net sales benefitted from the favorable impact of net foreign currency fluctuations of approximately $0.9 million, or 1.1%. GAAP operating margin was 0.4% compared to 9.8%. Operating margin was unfavorably impacted by non-cash asset impairment charges of $11.4 million and restructuring charges of $0.5 million, compared to asset impairment charges of $0.5 million in the same period last year. These items unfavorably impacted the year over year comparison of operating margin by 14.2 percentage points. The remaining improvement in operating margin is primarily due to a favorable margin mix, lower media advertising expense, and cost savings from our restructuring plan, Project Refuel. The improvement was partially offset by the net sales decline and its unfavorable impact on operating leverage.

Balance Sheet and Cash Flow Highlights 

• Cash and cash equivalents totaled $20.7 million, compared to $23.8 million
• Total short- and long-term debt was $289.9 million, compared to $485.6 million, a net decrease of $195.7 million
• Accounts receivable turnover was 61.3 days, compared to 60.4 days
• Inventory was $251.5 million, compared to $280.9 million, a net decrease of 10.5%. Inventory turnover was 3.0 times compared to 2.8 times
• Net cash provided by operating activities of $218.6 million and free cash flow of $205.0 million for fiscal 2018, compared to net cash provided by operating activities of $212.5 million and free cash flow of $197.0 million for fiscal 2017

Fiscal 2019 Annual Outlook

 For fiscal 2019, the Company expects consolidated net sales revenue in the range of $1.485 to $1.510 billion, which implies consolidated sales growth of 0.4% to 2.1% after accounting for the expected impact from the adoption of ASU 2014-09 "Revenue from Contracts with Customers" (Revenue Recognition Standard) in fiscal 2019 with conforming reclassifications to fiscal 2018. We expect the adoption of the Revenue Recognition Standard to result in the reclassification of certain expenses from SG&A to a reduction of net sales revenue in the amount of $13.0 million in fiscal 2019, with a corresponding conforming reduction to net sales revenue of $10.9 million in fiscal 2018. Please refer to the table entitled "Fiscal Year 2019 Outlook for Net Sales Revenue After Adoption of Revenue Recognition Standard" in the accompanying tables to this press release for additional information. 

The Company's net sales outlook assumes the severity of the cough/cold/flu season will be in line with historical averages, which unfavorably impacts the year-over-year comparison by 1.1%. The Company's net sales outlook also assumes that March 2018 foreign currency exchange rates will remain constant for the remainder of the fiscal year. Finally, the Company's net sales outlook reflects the following expectations by segment: 

• Housewares net sales growth in the mid-single digits;
• Health & Home net sales growth in the low-single digits, with an unfavorable impact of approximately 2.5% from the average cough/cold/flu assumption; and
• Beauty net sales decline in the low- to mid-single digits.

The Company expects consolidated GAAP diluted EPS from continuing operations of $6.30 to $6.50 and non-GAAP adjusted diluted EPS from continuing operations in the range of $7.30 to $7.55, which excludes any asset impairment charges, restructuring charges, share-based compensation expense and intangible asset amortization expense.

The year-over-year comparison of adjusted diluted EPS is impacted by an expected increase in growth investments in support of the Company's Leadership Brands of 14% to 18% in fiscal 2019. The year-over-year comparison is also unfavorably impacted by approximately $0.12 to $0.14 from the average cough/cold/flu assumption and approximately $0.15 from fiscal 2018 tax benefits that are not expected to repeat in fiscal 2019.

The Company's diluted EPS from continuing operations outlook assumes that March 2018 foreign currency exchange rates will remain constant for the remainder of the fiscal year. The diluted earnings per share outlook is based on an estimated weighted average diluted shares outstanding of 27.0 million.

The Company expects net cash provided by operating activities growth in the range of 10% to 12% for fiscal 2019. The Company expects capital expenditures in the range of $30.0 million to $35.0 million, which includes approximately $15.0 million in expected leasehold improvements from multiple office relocations not expected to repeat in the near future.

As previously announced, the Company has initiated Project Refuel, which continues to target annualized profit improvement of approximately $8.0 million over the duration of the plan. The plan is estimated to be completed by the first quarter of fiscal 2020, and the Company expects to incur total cumulative restructuring charges in the range of $3.2 to $4.8 million over the same period.

The Company expects a reported GAAP effective tax rate range of 9.0% to 11.0%, and an adjusted effective tax rate range of 8.7% to 10.7% for the full fiscal year 2019, which reflect an ongoing benefit from U.S. tax reform of approximately 1.0 percentage point. The Company's outlook assumes that tax benefits of approximately $4.1 million recorded in fiscal 2018 will not repeat in fiscal 2019, which unfavorably impacts the year over year tax rate comparison by approximately 2.1 percentage points. Please refer to the schedule entitled "Effective Tax Rate (GAAP) and Adjusted Effective Tax Rate (Non-GAAP)" in the accompanying tables to this press release.

The likelihood and potential impact of any fiscal 2019 acquisitions and divestitures, future asset impairment charges, future foreign currency fluctuations, or further share repurchases are unknown and cannot be reasonably estimated; therefore, they are not included in the Company's sales and earnings outlook.