Helen of Troy: Cheap, But Questions Linger Amid Olive & June Acquisition

seekingalpha11-22

Helen of Troy Limited's shares have dropped significantly due to inflation, reduced discretionary spending, and operational execution issues, despite holding leading positions in niche consumer brands...

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The operator of a collection of a wide number of consumer brands in niche segments has been hurt by inflation and reduced discretionary spending, especially apparent in product categories in which the business was overrepresented. With HELE shares down two-thirds from their highs, the low valuations and leverage ratios were starting to reveal appeal. That was a bit premature, as it turned out, as the company saw another setback to the 2025 results. In this light, I like the lower valuation, but I question some operating execution and frankly the decision to pursue an additional M&A deal. Consumer Brands Helen of Troy is a collection of a wide number of consumer brands, each holding leading positions in niche segments. These include names like OXO, Vicks, Braun, Pur, Drybar, and Revlon, among others. Until the 2000s it was largely based on beauty & wellness brands, but over time the company has diversified into other categories like home & outdoor, among others. The philosophy behind the business is that of owning brands that display strong growth and post high margins, driven by relatively high market share in niche segments. Most of these businesses are further characterized by low capital expenditure requirements, while management teams have relatively a lot of autonomy to make their own decisions. The company saw its shares peak at $250 in 2021, as the non-paying dividend company has seen shares tenfold since 2011, being a strong achievement. After shares peaked that year, financial results peaked in the year thereafter, when sales were posted at $2.2 billion, accompanied by healthy EBITDA margins of 17%. This was in part driven by a $414 million acquisition of Osprey Packs in 2021, and a $150 million deal for Curlsmith in 2022, yet the hiccups started at the time. This was not just a reversal of consumer trends post-pandemic, as well as inflationary spirits hurting the business. There were also some \"own\" issues, with the company facing concerns by the EPA regarding packaging claims on water and filtration products (later largely resolved). The Woes Amidst the issues described above, Helen of Troy posted a 7% fall in fiscal 2023 sales (reported early in 2023) to $2.07 billion, with EBITDA down 13% to $327 million. Adjusted earnings were posted at $9.45 per share. The company guided for 2024 sales to fall further to $1.99 billion, with adjusted earnings seen down to $8.50-$9.00 per share. In the end, 2024 sales fell 3% to $2.01 billion with adjusted earnings posted at $8.91 per share, yet that excluded for a $1.33 per share stock-based compensation, or SBC, expense, as otherwise realistic earnings came in around $7.50 per share. Net debt of $650 million was equal to less than 2 times EBITDA of $336 million. The issue is that for another year in a row, investors had to look forward to no progress. This came as management guided for fiscal 2025 sales to come in around $2.00 billion, with adjusted earnings seen at $8.95 per share, plus or minus twenty-five cents. Trading at $90 in April, I believed that appeal was found, but that seemed a bit early. Falling And Recovering Since April, shares have seen a bombshell report in July, causing shares to fall to lows of $50 per share in August, before recovering to $70 today. The fall came after the company posted dreadful first-quarter results, with sales down 12% to $417 million, as adjusted earnings of $0.99 per share were essentially cut in half. The company subsequently cut the full-year sales guidance to $1.91 billion, attributed to lingering inflation, softer consumer spending, and execution challenges in its distribution facility. The company reduced the full-year earnings guidance by a dollar and seventy cents, to $7.00-$7.50 per share. As a signal of undervaluation and moderating leverage ratios, the company announced a new $500 million buyback program. That program, which will not be executed overnight, is huge, enough to buy back 43% of the shares at the prevailing levels! In the fall, the company posted a 3% fall in second-quarter sales. While adjusted earnings were still down 53 cents on the year to $1.21 per share, this kind of profitability suggested real sequential improvements in earnings. Net debt was reported at $693 million, and with EBITDA seen around $292 million in this depressed year, leverage ratios are seen around 2.4 times. Weakness is driven notably in Beauty & Wellness, while Home & Outdoor is doing relatively well. With 22.8 million shares having recovered to $70 per share, the market value of the firm has stabilized at $1.6 billion, for a $2.3 billion enterprise valuation. This values the business at around 1.2 times sales, about 12 times depressed EBITDA, and equity at just about 10 times adjusted earnings. A Surprising Deal With the company still in recovery mode and the company announcing large buybacks at depressed levels, while leverage is moderate, I was surprised to learn that Helen of Troy resorted to M&A efforts again in November. The company has reached a $240 million deal to acquire Olive & June, a nail care innovator. The deal, which includes a $15 million earn-out, is valued at 11 times 2025 EBITDA, that is before synergies. The deal is set to be immediately accretive to growth, gross margins, earnings per share, and free cash flow conversion. Olive & June provides polish, artificial, tools, treatment, and care services and is set to add $92 million in sales, suggesting that a relatively rich sales multiple has been paid at 2.6 times sales. However, with a roughly $20 million EBITDA contribution, its margins are very impressive. Pro forma net debt will jump to $920 million, with pro forma EBITDA seen around $312 million, for a leverage ratio near 3 times. That is ahead of synergies to be realized, which will likely be stuck at a few millions but ahead of an anticipated improvement in the own business performance here. What Now? Frankly, I think that current levels still represent value, but I am puzzled behind the transaction. In exchange for about 10% of the current valuation, the company is buying Olive & June, which adds about 5% to pro forma sales and about 7% to EBITDA. Alternatively, a $240 million investment would have allowed the business to retire 3.4 million shares, about 15% of the outstanding float here, that is even at $70 per share. Buying a cheaper business with an overpriced share in the past in the past was a good thing. However, now I wonder how capital allocation has been decided, as frankly I would have liked to see buybacks over M&A here, certainly in combination with operating focus. Moreover, the quality of organic growth of Helen of Troy Limited's own business is dismal, as the move in shopping habits to budget categories is hurting the premium positioning of some of its brands. After all, some issues are self-inflicted, as flattish sales for three years in a row now, in an inflationary environment, suggest real execution and positioning issues at hand here as well.  Amidst all this, I still think that there is value. However, this is not a high-conviction play for me here, as frankly I am surprised by the positive share price reaction in response to the deal announcement.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.4","shortVersion":"4.29.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485174267"}