Helen of Troy Limited (HELE) Earnings Call Transcript & Summary

Greetings. Welcome to Helen of Troy Limited's First Quarter Fiscal '27 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. At this time, I'll turn the conference over to Anne Rakunas, Director of External Communications. Thank you, Anne. You may now begin.

Thank you, operator. Good morning, everyone. Welcome to Helen of Troy's First Quarter Fiscal 27 Earnings Conference Call. The agenda for the call this morning is as follows: I will begin with a brief discussion of forward-looking statements. Scott Uzzell, our CEO, will then share his thoughts and areas of focus; and Brian Grass, our CFO, will provide an overview of our financial performance in the first quarter and outline our expectations for the full year fiscal 2017. Following our prepared remarks, we'll open up the call for Q&A. This conference call may contain forward-looking statements that are based on management's current expectation with respect to future events or financial performance. Generally, the words anticipates, believes, expects and other similar words or words identifying forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that could cause anticipated results to differ materially from the actual results. This conference call may also include information that may be considered non-GAAP financial information. These non-GAAP measures are not an alternative to GAAP financial information and may be calculated differently than the non-GAAP financial information disclosed by other parties. The company cautions listeners not to place undue reliance on forward-looking statements or non-GAAP information. Before I turn the call over to Scott, I would like to inform all interested parties that a copy of today's earnings release can be found on the Investor Relations section of our website by scrolling to the bottom of the homepage. The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures. We've also posted an investor presentation to our website. And with that, I will now turn the conference call over to Scott.

Good morning, everyone. Thank you for joining us. When we last spoke, we laid out our ambition to be a better company on the road to being a bigger company. Today, I want to share our progress on being a better Helen of Troy. We are focused on getting closer to the consumer, sharpening business -- how we run our business, we're starting to see early evidence we're making progress. Our quarter 1 sales results came in ahead of our expectations across both our business segments. Our margin EPS performance reflects deliberate investment in brands, innovation and people as we focus on building more consistent, durable enterprise, not just a quarter or 2 of improvement. While we're encouraged by a solid start to the fiscal year, we remain clear eye. This is the first year of a multiyear road map. One we laid out for you in April at our April earnings call, we're focused on the work to be done to make Helen of Troy reach our potential. The long-term lens is particularly important as we continue to navigate a dynamic operating environment. The consumer remains under pressure, and we're managing through a more volatile cost environment. We're taking disciplined actions to balance near-term margin pressures while positioning the business for the long term. As we've said before, we cannot control the macro, but we can control how we execute within it. And while we're executing well and where we're executing well, we are winning. Our North America POS, they track channels. We saw consolidated growth year-over-year, concentrated in Braun, Osprey, OXO, Olive & June. On a sequential basis, compared to fourth quarter, trends improved in key areas with the biggest improvement in Beauty & Wellness. Some brand callouts include Osprey's daylight and transporter expandable travel packs that deliver consumer-relevant solutions seamlessly converting from a personal item to an airline approved carry on. This is differentiated innovation over-delivering against financial targets and driving meaningful share gains. OXO successfully extended the brand's award-winning performance and intuitive design into the high-growth pet category with a range of new products spanning feeding bowls, stands, mat, storage solutions, presenting the brand to capture incremental demand and expanding adjacent categories. Braun blood pressure monitors launched a NAS channels last fall. They combined medical-grade accuracy with simplicity. They are outperforming plans and stand out as the only product in the category gaining share, the world's largest mass retailer based in the U.S. And Olive & June launched an out of this world collaboration with Star Wars, the Mandalorian and Grogu, bringing consumer collectibles, exclusive and culturally resonant products that elevate the brand and drive engagement at scale. These results reflect a simple point. Brands that deliver meaningful innovation and meet real consumer needs can continue to win even in a more cautious spending environment. But as we said last quarter, fiscal '27 is about restoring momentum by focusing on editing and amplifying the priorities and actions of the enterprise by directing our time, capital and attention towards the highest impact opportunities. Our actions are guided 3 pillars: first, consumer first innovation; second, commercial and operational excellence; third, our people and culture. As we reenergize the organization, we want to ensure that we have the capabilities to win. Our approach is intentional. We're focused first on strengthening operational discipline and improving how the business runs before we lean more fully in the broader brand acceleration. In Q1, we've made meaningful progress against these priorities that form key elements of our 3 pillars: making our consumer-centered offense reality, going from the abstract to how do we make this real. And it's about how we organize and what we do every day. First, we're targeting how we run the business, fewer priorities, clearer choices, more consistent execution against the things that matter most. A key step in executing our strategy is how we are evolving our operating model. We are reshaping the organization to move closer to our consumers, putting the energy, the inertia, the focus of decision-making closer to our consumer marketplace. This is about building brands and products that deliver utility and style. This is how amazing brands are built and create magical connections with their consumers. This can only happen when leaders live in the cultural space and life for the consumer so they can take consumers to new places. Our new Helen of Troy office will enable this to be a cornerstone of our company of the future. Under this model, we've designated 5 dedicated segment general managers, each of full ownership of the brand portfolio, including strategy, innovation, commercial execution and business results. These roles are a mix of internal leaders stepping into expanded roles as well as recruiting external talent, external count to broaden the capabilities of the organization, a deliberate combination that gives us both continuity and fresh perspective without materially increasing our operating costs. We've also formalized 3 geographic or geo general managers roles to stitch and accelerate brand development beyond the North American borders. It's strategic, it's intentional and focused brand building in the right global markets to better leverage our strong international structure that's already in place. The result is dedicated leaders who live and breathe a focused consumer segment or marketplace rather than balancing competing priorities across multiple brands. We expect this will free up our segment presidents do what they do best, clear the forest for strategic growth by scaling enterprise solutions, advancing cross-portfolio opportunities and shaping our long-term strategic agenda. We believe this result in a company closer to the consumer with sharper ownership, faster decision-making and the leadership firepower to unlock full potential of our brands. This is a natural next step in the operating model evolution we described last quarter. Second, we're strengthening the fundamentals of our commercial and operational execution. We've identified clear priorities to operate with greater discipline, and we are moving quickly to address that. This starts with pricing discipline. Our previous pricing actions now in place across our major brands are largely holding in the market, though we continue to monitor retailer consumer response in select areas where elasticity has been higher than expected. Related focus is improving the quality of our revenue, being more deliberate about our product and channel mix, reducing exposure to lower-margin channels and shifting towards higher-value products and customers. We are also bringing greater consistency to how we price and promote ensuring we drive demand in ways that protect brand value. At the same time, we are improving alignment across sales, marketing and product with a sharper focus on higher-impact products and our most important customers. At its core, this work is about bringing greater control and consistency to how we operate across channels and with our customers. In parallel, we're strengthening the core capabilities that enable consistent execution. In e-commerce, we are bringing greater discipline to how we show up across channels, starting with pricing alignment and improving marketplace dynamics, including addressing third-party sellers to create a more consistent presence. We're also continuing to improve our digital shelf and retail media effectiveness, areas where we see meaningful opportunity. In demand planning, we're in the early stages of building a more connected approach to forecasting, improving how we link demand signals, promotional plans and inventory decisions. And while we're doing all these things every day, we're maintaining a disciplined approach to capital allocation and balance sheet management as we strengthen the foundation of the business. Lastly, we're making progress and how decisions get made. We are simplifying processes, reducing unnecessary complexity and pushing decision-making closer to the consumer in marketplace. As a result, we are already seeing faster decision-making across the organization. Our brand teams are collaborating more closely on incremental distribution opportunities. Our marketing and product teams are actively deploying test and learn model to try new tactics and measure results before scaling. These changes are fostering a more efficient operating model with clear ownership, one that enables us to act with clarity and control. At the same time, we're continuing to invest our time and resources and growth. Our approach is disciplined. We're targeting areas where we have a clear right to win and where the returns are compelling. A really good -- or a great example of this is in our international business. We plan to accelerate growth by evolving how we go to market leading into a more agile hybrid model that pairs strong local partners that know the market with direct consumer engagement with our brands. It's a more flexible approach in helping us move a lot faster, execute better and build stronger connections with consumers as we scale in specific global markets. We'll share more about this later this fall. We're being delivered in these investments and certain that we're aligned with the near-term priorities and our ability to execute. So as we look ahead, our focus remains on execution on giving you visible markers of progress. We'll have more to share in the coming quarters. To bring it all together, we're encouraged by how the year is starting and the progress we're seeing. Our focus now is staying disciplined, building consistency and continuing to get better at how we operate. Execution will drive the rest of the year, delivering great problem-solving products, moving on key commercial priorities and managing through cost volatility. We've still got work to do, but we're headed in the right direction, and we're building on a strong foundation to unlock full potential of our portfolio and drive more consistent long-term growth. With that, I'll turn it over to Brian.

Thank you, Scott, and good morning, everyone. We believe our start to fiscal '27 is another step in the right direction with net sales and adjusted EPS above our expectations, driven by disciplined execution across the organization and improving business fundamentals. I'm encouraged by how we are navigating a dynamic operating environment and addressing margin pressure from heightened geopolitical and supply chain disruption, which I will cover in more detail shortly. Overall, the quarter reinforces the initial progress we are making as we transition to a growth-first model while maintaining a prudent and disciplined approach to investing back into our business and mitigating supply chain volatility. Turning to the financial highlights for the first quarter. Consolidated sales increased 8.2% favorable to our expectations. Note that our Q1 sales results benefited from approximately $4 million to $5 million of favorable order phasing driven by the earlier timing of Prime Day. For Home & Outdoor sales increased 9.5%, with broad-based growth across all 3 brands. Osprey was the strongest performer with growth driven by improvements in our international distribution network and e-commerce momentum. OXO benefited from lapping prior year tariff-related disruption, strong point-of-sale trends and expanded brick-and-mortar distribution. Hydro Flask growth reflects expanded retail distribution, inventory optimization and e-commerce momentum. For Beauty & Wellness, sales increased 7%, reflecting growth in both Beauty & Wellness. Our Wellness portfolio outperformed expectations driven by growth across Braun, Vicks, Honeywell and PUR, driven by lapping prior year tariff-related disruption, solid point of sale and expanded distribution. In Beauty, Olive & June led the way with strong growth supported by expanded distribution, continued innovation and strong consumer engagement. These gains were partially offset by continued softness in some of our core beauty brands, reflecting ongoing point-of-sale pressure and pricing elasticity impacts. International sales increased 1.1% for the quarter. Growth was driven primarily by Osprey's improved distribution network and broad-based strength across the wellness portfolio, partially offset by softer consumer demand in Kitchenware and hair appliances amid a competitive retail environment. Our margins and profitability were largely in line with our expectations with adjusted EPS and EBITDA results, reflecting the execution of our growth first model that reinvest the majority of overperformance back into the business. We recognized a pretax benefit of $1.8 million for Phase 1 tariff refunds that we estimated to be collectible as of the end of the quarter, which contributed to adjusted EPS ahead of expectations. I'll share more regarding tariff refunds when I cover our outlook for the remainder of the year. Consolidated gross profit margin decreased 110 basis points to 46%, reflecting the net unfavorable impact of tariffs a less favorable inventory obsolescence impact year-over-year and a less favorable customer mix within Home and Outdoor. We expect the first quarter of fiscal '27 to have the most year-over-year gross margin compression from tariffs due to higher rates still cycling through cost of goods sold and minimal tariff impact in the same period last year. SG&A ratio decreased to 31% compared to 45.1% in the same period last year, primarily driven by a pretax gain of $55 million from the sale of a distribution facility that we disclosed in April, partially offset by higher investment in our people year-over-year. Adjusted operating margin decreased 30 basis points to 4%, reflecting the unfavorable impact of tariffs and higher investment in our organization and go-to-market structure, partially offset by lower outbound freight and favorable operating leverage. Moving on to balance sheet highlights. Inventory ended at $467 million, a $17 million decrease from the prior year despite approximately $15 million of incremental tariff costs in inventory. We reduced our total debt by $716 million as we used the proceeds from the sale of the distribution facility to lower outstanding borrowings. Our net leverage ratio decreased to 3.48x compared to 3.87x at the end of the fourth quarter. Free cash flow was slightly negative in the quarter, primarily due to cash used for tariff payments annual incentive compensation payments and higher cash taxes, partially offset by an increase in cash earnings. Turning now to our full year fiscal '27 outlook. We are raising our net sales expectations slightly to $1.759 billion to $1.831 billion, with Home & Outdoor net sales of $859 million to $884 million and Beauty & Wellness net sales of $900 million to $947 million. We are maintaining adjusted EBITDA of $190 million to $197 million which implies year-over-year growth of 2.1% to 6.3%. We are maintaining adjusted EPS of $3.25 to $3.75 and we are maintaining free cash flow of $85 million to $100 million while increasing our planned capital expenditure range by $2 million. Our full year revenue outlook reflects our first quarter performance, partially offset by retailer order pull forward of approximately $4 million to $5 million out of the second quarter due to the shift in Prime Day timing as well as revenue risk from expected supply disruption largely driven by the conflict in the Middle East. Our adjusted EBITDA and EPS outlook now reflects the pretax benefit of Phase 1 tariff refunds now estimated to be approximately $9.2 million but that benefit is more than offset by the expectation of cost inflation for the remainder of the year. The higher costs are being driven by increases in commodity inputs and pressure from unfavorable Chinese lawn fluctuations increased inbound and outbound freight expense and higher cost of secured goods to avoid supply disruption. Some of this pressure was building before the conflict in the Middle East, but the heightened geopolitical and supply chain disruption has exacerbated the impact we are now expecting. We are not assuming any benefit from future tariff refund phases at this time since we can't reliably predict when those refunds might be received or whether they will ultimately be collected. We are preparing to file claims for the second phase of tariff refunds, which was just announced on June 29. When we are able to get enough clarity on the timing and collectibility, I expect that we will include future phases in our outlook. We have paid $71 million in EPA tariffs that were not included in the Phase 1 refund process. While we expect that future phase refunds could provide some upside to our current earnings outlook, we are developing plans to reinvest a large portion of the P&L benefit back into our business as well as increase our capital expenditures on key product development and commercial initiatives with the expected cash flow benefit. In terms of quarterly cadence, we expect first half year-over-year sales growth in the low to mid-single digits with a low single-digit decline in the second half of the year. Due to the cadence of people and brand investment and higher average tariff costs cycling out of inventory and into cost of goods sold in the first half of fiscal '27. We now expect roughly 20% of our total annual adjusted EPS outlook in the first half of the year with roughly 15% in the second quarter, consistent with our previous outlook. In closing, while the operating environment remains challenging with increasing inflationary pressures, softer and more selective discretionary demand, cautious retailer behavior and elevated promotional intensity. We are taking deliberate actions to position the business for improved performance and deliver reliable results. We continue to prioritize targeted investments in our brands and capabilities to position us for growth the store operating leverage and build long-term momentum. While we make plans to use additional potential tariff refund benefits, the feed the flywheel even further and mitigate expected inflationary pressure on our supply chain. Our continued focus on working capital efficiency and balance sheet productivity supports both strategic investment and operational flexibility. We continue to evaluate opportunities to enhance financial flexibility and concentrate our resources on our core business as we advance in our next phase. And with that, I'll turn it back to the operator for Q&A.

[Operator Instructions] And our first question comes from the line of Bob Labick with CJS Securities. .

Congratulations on a good start to the year. So just kind of starting off with what, Brian, with you just finished up with a little bit of kind of cadence and guidance there. Can you just maybe expand a little bit upon when the tariff refunds may hit the P&L if you think about that? And just -- and the drivers of the kind of, I guess, low single-digit declines in the second half revenue that you've talked about, which is consistent with what you said last time as well.

Yes. And just to clarify the second point, Bob, when I referred to low single-digit decline for the second half, that refers to the midpoint of our range. I failed to say that when speaking but that is the intent. Then to kind of go back and get to your question about tariff refunds and cadence, we don't totally know because the process while it's defined in terms of what to do to submit refund claims and there's a general rule that within 90 days, you should get claims approved. It doesn't totally follow -- there's doesn't appear to us that there's a pattern that we can reliably depend on. But what I would say is this is the first phase, which is about $7 million remaining yet to be selected. I would expect that the bulk of that would be collected within our second quarter. Then that leaves future phases. And really, we haven't even submitted our Phase II claims yet. And then we know we're going to have some claims that fall out of Phase II and will fall into potentially a Phase III or a Phase IV. So I do see that the tariff refund benefit getting spread out over a period of quarters. I do think that potentially we could have some even fall into fiscal '28 probably won't be hugely meaningful. But I do think that, that is possible at this point in time. And I actually like the fact that the cadence is being spread out a little bit is not concentrated in 1 quarter because that gives us the ability to better execute the reinvestment back into the business. If it's all in 1 quarter, it's very hard to match up the spending with the benefit if it's spread out over a period of time, I think we can really do well to invest to benefit and improve the health of our businesses. So that's kind of our view of the potential cadence. I know it probably doesn't give you much more in terms of specifics, but it's kind of the best information we have. And if there's questions about reinvesting that, happy to take those questions.

Yes, actually, that was exactly where I wanted to go with that. Obviously, you saw some nice recovery and good sales growth in the quarter. And part of what you've been talking about particularly last quarter and I think even a little before is reinvest in the business to get growth versus cut to get higher earnings. And so maybe talk a little bit about where are you seeing now that you've had a little more time to look into it or explore it or whatever you want to call it where are you seeing the best opportunities for reinvestment to get kind of near-term growth, what brands and what areas offer the best opportunities for reinvestment?

Bob, this is Scott. I'll take the first part and then Brian can finish it off. Thanks, Bob. I'd say this, just to be consistent with what we talked about last quarter is that we know a healthy Helen of Troy to make us a better Helen of Troy is built on healthy brands. And so we're focused really in 5 areas maniacally. An agile operating model, which is really investing in talent and how we stand up getting our folks closer to the consumer. I'll talk more about that. investing in strategic innovation against many of our brands that are ready to connect with the consumer, investing in omnichannel acceleration, making sure we've got the right capabilities to work brick-and-mortar, online as well as in between. We've been standing up work in our supply chain, how we make and move product around the world. And then I just recently was over in Asia, spending time for our international team on what's the right markets going forward to be short -- fewer markets that are more sharper the right business model to execute investment in other parts of the world. So it's really around brands, innovation and people. That's what we're focused on as we go to more growth forward approach in 2027. Brian, you may add.

Yes. The only thing I would add is the intent is also to mitigate any cost inflation that's above and beyond what we've assumed in our outlook currently. We have made an attempt to capture our current view of what that is and that's already baked into the outlook that you have to the extent that it's worse than what we currently estimated, we would use part of the tariff refund benefit to mitigate those extra costs. That's not our preference in our base plan. Our base plan is to use it for reinvestment, but it is there as a buffer as well. Thank you.

The next question is from the line of Peter Grom with UBS.

Great. I guess I just wanted to get some perspective on the revenue outlook. I think Brian, you kind of gave some commentary around the pull forward around Prime Day, which makes sense. And I think you also made a comment around revenue risk from expected supply disruption. So can you maybe just unpack that a bit? Is that just conservatism given the current environment? Or is that something you have a reasonable line of sight into?

Brian, let me take the first part, and I'll let -- you can pay it off. I think as we look at our enterprise, we're focused on the things 80% that we believe we can control, which is investing in brands, people and new product innovation and getting back to growth. But think about the external factors that are out there, whether it be continued inflationary pressures, softness in discretionary categories, retailers in the marketplace in general, being just much conservative as they wait buy. These are things that are not just for us. This is everybody in the category. We're just -- it's just we live in an uncertain world. But Brian, I don't know if you want to talk more about the way we cadence the revenue throughout the year. But we're confident in the work that we're doing inside the building to make sure we're better [indiscernible], but we have a lot of concerns in the long term. We just have -- are cautious around what's happening around the world that we deal in. Brian, any adds?

No, I agree with all of that. And just to do the math on kind of if you say we beat expectations by $25 million in the first quarter, the -- there's $5 million approximately, that was pulled forward out of Q2. So I think factored that into the equation. We flowed through 10, so that is about 15 in terms of potential supply risk that, to your point, we do have line of sight to. And up until yesterday, I would say things are moderating and starting to look better, and that's a conservative estimate. But now you have the things that happened last night where there's probably going to be more disruption. So I think it was intended to be a conservative estimate of the potential supply chain. And it's -- look, it's 2 or 3 pinch points where we may have scarcity of supply and will we be able to get access to that supply. It's not like it's a massive amount in the system. So it's really 2 or 3 pinch points or being -- we're trying to be conservative and hopefully appreciate that as volatile. I mean, 1 day, 2 days ago, I would have said things are moderating, but up until last night, things going in the other direction. And so I'm glad that we embedded a conservative point of view into our outlook.

That's helpful. And I guess I wanted to go there next. I mean, I guess going back to April, right. I think -- and I know some of this was not included in the guidance, but there was some thought around the benefit from tariffs would kind of largely offset input costs. And I know Phase 1 refund is coming through. But -- and I hear you, yes, in the last couple of days are starting to move the other way, but it would appear from our perspective that relative to where we were in April, that costs are lower. So can you maybe just provide some context around what's embedded from the outlook from a cost standpoint? And just given how volatile how we should be monitoring that as we think about the balance of the year?

Yes. Not to give you specific amounts, Peter, but what we said was -- so there was a tariff fund benefit that we are now capturing in our outlook, and that's about $9 million. We said that the cost that we're estimating is more than that, more than offsets that. And so not to give you a specific amount, what we've assumed is something greater than the $9 million of tariff refund benefit. And we've kind of found a way to offset the amount that's more than the tariff refund. So that's our current view. And look, you got to understand it takes time for some of that to bleed through -- the total cost of this inflationary pressure will be higher than that greater than $10 million number, but it takes time for that to cycle through cost of goods sold. And so that's why it may be smaller -- please go ahead, I'm sorry. .

No, I was just going to say probably just to clarify, like would -- if I were to include the other phases of the tariffs, would that be more than enough to offset the inflation? I think that's how I originally interpreted to comment back to April. Rather not just the phase 1.

Yes. In terms of impact of fiscal '27, I would expect if we're able to collect all of the tariff refunds that we are do that the tariff refund benefit would be greater than the inflationary cost pressure. Yes, that's a reasonable assumption.