Is Helen of Troy a Trojan Horse Stock?
Helen of Troy Limited (NASDAQ:HELE) is one of the most intriguing companies I have come across. In fact, its name is the first to catch your eye, as fellow fans of Greek Mythology will recall that Helen of Troy was the daughter of Zeus and Leda, and was considered the most beautiful woman in the world. I wish the same could be said for the stock. You might also recall that her abduction was a trigger event causing the Trojan War. Is this battleground stock worthy of a place in your portfolio?
To answer this question, we must first understand what this company is all about. First, it faces no direct competition from a publicly traded company — rather, it faces competition from the privately held Conair. It does have some indirect competition from Revlon Inc. (NYSE:REV). Like these companies, Helen of Troy designs, develops, imports, markets, and distributes a portfolio of consumer products in the United States, Canada, Europe, Latin America, and internationally. It operates in three segments: Personal Care, Housewares, and Healthcare/Home Environment. The Personal Care segment offers curling irons, straightening irons, hot air brushes, hand-held dryers, hard and soft-bonnet hair dryers, hair setters, facial and skin care appliances, foot care appliances, hair clippers and trimmers, hand held and lighted mirrors, hair brushes, hair styling implements, decorative hair accessories, liquid hair styling products, conditioners, shampoos, liquid and/or medicated skin care products, fragrances, deodorants, and antiperspirants. Just about all of these are befitting of a name like “Helen of Troy.”
Unlike the beauty segment of the company, the Housewares segment provides food preparation tools and gadgets, food storage containers, cutlery, household cleaning tools, tea, coffee and hydration products, bathroom accessories, storage and organization products, and baby and toddler care products. The Healthcare/Home Environment segment offers thermometers, blood pressure monitors, humidifiers, heating pads, and hot/cold wraps; faucet mount water filtration systems, pitcher based water filtration systems, and refrigerator filter. It also offers air purifiers, heaters, fans, humidifiers, dehumidifiers, and insect controls. The company sells its products through mass merchandisers, drugstore chains, warehouse clubs, home improvement stores, catalogs, grocery stores, specialty stores, beauty supply retailers, e-commerce retailers, wholesalers, and various types of distributors, as well as directly online to end user consumers.
So, how can we know if this intriguing company deserves a place in our stock allocation? Well, we have to look at recent performance of course. Net sales revenue grew to a record $311.8 million compared to $304.5 million in the first-quarter of fiscal year 2014. However, gross profit margin declined to 38.3 percent compared to 39.5 percent for the same period last year. This decrease reflects increased promotional program costs, a revenue increase in the lower margin Healthcare/Home Environment segment, a lower margin sales mix within the Housewares and Healthcare/Home Environment segments, and general product cost increases.
Expenses as a percentage of sales also declined. Expenses were 28.0 percent of net sales compared to 28.7 percent of net sales for the same period last year. The decrease is primarily due to lower incentive compensation costs partially offset by higher media advertising costs. Operating income was $23.1 million. This is compared to operating income of $20.6 million in the same period last year.
What is comes down to is earnings growth. Net income grew to $16.4 million, or $0.55 per fully diluted share. This compares to net income in the first-quarter of fiscal year 2014 of $14.4 million, or $0.45 per fully diluted share. Adjusted EBITDA was $41.9 million compared to $44.6 million in the same period last year. Julien R. Mininberg, Chief Executive Officer, stated:
“We are off to a solid start in fiscal year 2015. During the quarter, we increased our net sales revenue by 2.4 percent and managed expenses well to deliver adjusted EBITDA of $41.9 million and adjusted diluted earnings per share of $0.83. During the quarter, we continued our efforts to transform our organization and reinvigorate our culture. We also advanced our goal of accelerating and sustaining organic growth by investing prudently in our strongest businesses. We saw a double digit increase in our Healthcare/Home Environment segment revenues and a solid increase in our Housewares segment revenues on top of strong gains in the prior year in both of these segments.
We further engaged in shareholder friendly capital allocation policies through the repurchase of 4.2 million shares and the completion of the acquisition of Healthy Directions at the end of June, adding a growing business that is accretive to our gross margin, adjusted EBITDA and adjusted diluted earnings per share. Our Personal Care segment continued to deliver strong cash-flow; however as anticipated, sales trailed the prior year quarter. To unlock more of this segments cash flow generation capability and achieve organic growth, we are focused on increasing product innovation, adding additional talent and redirecting our existing resources to the strongest opportunities. I believe we are well-positioned to achieve the objectives we have set for ourselves this year. We are keenly focused on our goals and priorities for the future as we work to drive sustainable sales and earnings growth for many years to come.”
So where do we go from here? Well, although earnings and revenues were a touch light versus analyst’s estimates, I think the stock is a buy. For fiscal year 2015, the company continues to expect net sales revenue in the range of $1.325 to $1.375 billion, and diluted earnings per share in the range of $4.02 to $4.12. Consistent with the company’s previous outlook, adjusted diluted earnings per share is expected to be in the range of $4.30 to $4.40, which excludes non-cash asset impairment charges and the impact of the Healthy Directions acquisition. As such, I rate the company a buy and assign a $70 price target.
Disclosure: Christopher F. Davis holds no position in Helen of Troy or any other stock mentioned in the article and has no plans to initiate a position in the next 72 hours. He has a tentative buy rating on the stock and a price target of $70.