HRG (SPB) Up 17.4% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Spectrum Brands (SPB). Shares have added about 17.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is HRG due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Spectrum Brands Reports Q1 Loss & Sales Miss

Spectrum Brands reported dismal first-quarter fiscal 2019 results. The company reported quarterly loss and also missed sales estimates.

The company incurred adjusted loss per share of 20 cents from continuing operations in the fiscal first quarter against earnings of 68 cents registered in the year-ago quarter. Further, the Zacks Consensus Estimate stood at earnings of 40 cents.

Deeper Insight

Spectrum Brands’ net sales declined 4.9% year over year to $874.6 million and also missed the Zacks Consensus Estimate of $921 million. Excluding the $13.6 million adverse impact from foreign exchange, organic net sales dropped 3.4%.

The company’s gross profit decreased 4.1% year over year to $305.3 million. However, gross margin expanded 30 basis points (bps) to 34.9% mainly owing to favorable product mix. Further, the company reported operating income of $24.8 million, which plunged 51.7% from the year-ago period.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) decreased 13.1% to $115.3 million in the fiscal first quarter. Also, adjusted EBITDA margin contracted 120 bps to 13.2% on higher distribution and advertising costs coupled with adverse mix.

Segmental Performance

Spectrum Brands reclassified its reporting segments into Hardware & Home Improvement (HHI), Home & Personal Care (HPC), Global Pet Supplies (PET) and Home & Garden (H&G), effective first-quarter fiscal 2019. Markedly, the company’s newly-created Home & Personal Care segment includes Personal Care and Small Appliances businesses.

Spectrum Brands’ Hardware & Home Improvement segment’s sales fell 6.4% to $305.1 million mainly due to the absence of robust U.S. hurricane recovery demand in residential security, plumbing and builders’ hardware last year. Also, sluggishness in the housing markets negatively impacted the segment’s sales. Excluding adverse foreign currency impacts, the segment’s organic sales declined 5.9% year over year. Moreover, adjusted EBITDA at the segment fell 7.3% to $55.6 million.

Sales at Home & Personal Care segment were down 7.3% to $317.2 million, primarily due to decrease in global personal care revenues and somewhat lower global small appliances revenues. While sales at Personal care category declined double-digit in the United States, small appliances product saw significant decline in sales mainly on account of softness at the e-commerce category. Excluding adverse foreign currency impacts, organic net sales fell 4.3%. Furthermore, the segment’s adjusted EBITDA plunged 16.1% to $35 million.

Global Pet Supplies segment’s sales edged up 1.1% year over year to $204.7 million, chiefly driven by robust growth in U.S. companion animal revenues, partly mitigated with fall in aquatics sales in the United States and Europe. Excluding the adverse foreign currency impacts, organic sales rose 2%. However, the segment’s adjusted EBITDA fell 14.7% to $29.1 million.

The Home & Garden segment’s sales decreased 3.4% to $47.6 million. Further, the segment’s adjusted EBITDA plunged 42.6% to $3.1 million.

Other Developments

Spectrum Brands announced its five-year partnership with Manchester United plc, following which the former’s Remington personal care brand will be the Manchester Football Club’s foremost official Electrical Styling Partner. This deal is expected to help Spectrum Brands reinforce its Home & Personal Care segment besides making product innovation and marketing efforts.

Last month, the company completed the divestiture of its Global Auto Care (“GAC”) business to Energizer Holdings, Inc. As part of the deal, Energizer paid $938.7 million in cash and roughly 5.3 million shares of its common stock. The GAC business mainly includes appearance, performance and A/C recharge product categories.

Earlier, Spectrum Brands offloaded its Global Battery and Lighting Business to Energizer for $2 billion in cash. Following these strategic arrangements, management remains on track to execute actions like debt reduction to materially improve capital structure in fiscal 2019. Additionally, the company is set to concentrate on the development of its core business segments.

Notably, the company used these sale proceeds to repay debt of over $2.2 billion in sync with its plans to delever the balance sheet. In January 2019, Spectrum Brands prepaid its entire U.S. term loans of $1.23 billion, paid $114 million on its Cash Flow Revolver as well as redeemed $890 million of 7.75% senior unsecured notes.

As a result, the company’s gross leverage and net leverage came in at roughly 4.6 times and 3.1 times, respectively, as of Dec 30, 2018. The gross and net leverage declined from respective 5.8 times and 5.2 times at the end of fiscal 2018. Management continues to project leverage of roughly 3.5 times by the end of fiscal 2019.

Financials

Spectrum Brands ended the quarter with cash and cash equivalents of $252.4 million and above $664 million available under its $800 million Cash Flow Revolver. Total debt outstanding at first-quarter end was nearly $4,800 million.

Fiscal 2019 Guidance

Spectrum Brands reaffirmed its outlook for fiscal 2019. Backed by pricing, including tariff-related raises that is expected to come in effect on Mar 1, coupled with innovations, higher marketing investments and solid market share, net sales from continuing operations are projected to witness an improvement. Depending on existing rates, impacts from foreign currency translations on sales are anticipated to hurt sales by roughly 150 bps.

Further, the company envisions adjusted EBITDA from continuing operations to be in the range of $560-$580 million. Also, it projects capital expenditures from continuing operations of $70-$75 million for the fiscal year.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -33.37% due to these changes.

VGM Scores

Currently, HRG has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

HRG has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.

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