Why Helen of Troy Slipped 6% Despite Strong Q1 Results?

Shares of Helen of Troy Limited (HELE) fell 6% to close at 218.51 on July 8, after the company announced a lower-than-expected fiscal 2022 outlook based on the ongoing Environmental Protection Agency (EPA) matter. HELE is an American manufacturer and distributor of personal care and household products.

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The company reported stronger-than-expected fiscal Q1 results, topping both earnings and revenue estimates. The beat was driven by robust sales growth in the Beauty and Housewares segments, aided by higher store traffic from store re-openings.

The company reported adjusted earnings of $3.48 per share, beating analysts’ expectations of $2.62 per share. Revenues of $541.2 million exceeded the consensus estimate of $438.9 billion.

Meanwhile, earnings per share jumped 37.5%, while consolidated net sales grew 28.6% on a year-over-year basis. The company reported earnings of $2.53 per share in the prior-year period. (See HELE stock charts on TipRanks)

Update on the EPA Matter

The company said that it is in discussions with the U.S. EPA over concerns that packaging claims on some of its products were not in compliance with the agency’s regulations. The products include air and water filtration products and a limited subset of humidifier products within the Health & Home segment.

The company voluntarily implemented a temporary stop shipment action in the U.S. on May 27 and has implemented slight changes approved by the EPA to the labeling claims on its existing water filtration packaging.

Furthermore, the company resumed shipment of these products this week and is optimistic of achieving similar agreements regarding its air filtration and humidification packaging with the agency.

However, the company stated that the stop shipment action will remain in effect until it implements an approved labeling and repackaging plan.

During the quarter, the company incurred a charge of $13.1 million towards EPA compliance costs. Moreover, it expects to record additional charges related to relabeling or repackaging of the existing inventory and incremental freight and storage costs.

HELE’s CEO Julien Mininberg commented, “Our rapid response team is working to bring this to resolution as quickly as possible. Excluding the impact of the EPA matter, we were on track to achieve growth in both Core net sales and Core adjusted EPS, which is in line with the thinking we communicated in April.”

He further added, “Longer term, we remain committed to our Phase II Transformation Plan and expect to return to our Phase II targets of average annual organic revenue growth of 3% and adjusted EPS growth of 8% in Fiscal 2023 and Fiscal 2024. We also remain actively focused on acquisition opportunities to further accelerate long-term value creation.”

In June, HELE completed the sale of its Personal Care business, excluding the Latin American and Caribbean regions, to HRB Brands LLC, for a total cash consideration of $44.7 million. The sale is in sync with the company’s long-term strategic goal to focus on its core brands.

Fiscal 2022 Guidance

The company forecast an unfavorable impact on Fiscal 2022 financial guidance due to lost sales volumes resulting from the sale of the majority of the Personal Care business and the ongoing EPA-related stop shipment action.

Overall, management estimates both factors to negatively impact revenues by $110 to $135 million and adjusted diluted EPS by $0.70 to $1.00.

The company forecast adjusted earnings in the range of $10.46 – $10.97 per share, while the consensus estimate is pegged at $11.83 per share. Revenues are forecast to be in the range $1.93 – $1.98 billion range, versus the consensus estimate of $2.02 billion.

During the quarter, the company bought back 2% of its common stock, or 0.437 million shares, worth $95.5 billion at an average price of $218.58.

Analysts’ Take

Following the results announcement, Oppenheimer analyst Rupesh Parikh reiterated a Hold rating on the stock.

The analyst stated, “Excluding the impact of the EPA matter, guidance implies growth in core net sales and core adjusted EPS growth consistent with prior commentary. We still see a range-bound trade with upcoming difficult compares.”

Consensus among analysts is a Hold based on 2 Holds. The average Helen of Troy price target of $223 implies 2.1% upside potential to current levels.

Helen of Troy scores a 5 out of 10 on TipRanks’ Smart Score rating system, indicating that the stock is likely to perform in line with market expectations.