Helen of Troy Slips On Earnings

Good News Is Bad News For Helen of Troy

Helen of Troy NASDAQ: HELE  is a very well-positioned company for the pandemic. The company makes all manner of consumer products for the home and lifestyle and has seen double-digit sales increases over the past year. Oddly, the calendar second-quarter results blew past the consensus estimate yet shares are down more than 5% because of it. What this tells us is the market, if not the analysts, we're expecting strong results and weren't impressed with what they saw. If this sentiment persists during the reporting season it could spell real trouble for the broader market.

Helen of Troy Transformation Is Paying Off, But There's A Catch

Helen of Troy is a consumer products company deep in a transformation. The company has been divesting businesses and repositioning for growth over the last couple of years and those efforts have been paying off in spades. Add to that, the pandemic tailwinds and it's understandable why the company’s sustaining a high double-digit growth rate. The company just reported $541.22 million in net consolidated revenue for a gain of 28.6% over last year. That bettered the consensus by 2300 basis points and is up 43% over the two-year period proving the company's strategy is sound.

On an organic basis, the company reported 27.3% growth with strength in all categories. The Leadership Brand grew by 23% with a 4% tailwind from the digital channels. The 4% from digital channels may seem small but remember this is on top of last year's massive surge in digital sales. Moving down to the bottom line, the company reported mixed results but there is a mitigating factor. The GAAP operating margin shrank by 150 basis points over the past year because of costs related to an EPA issue. 

The EPA had a problem with the way some products were packaged and the company has been mitigating those issues. In total the impact of those issues cost the company $0.52 in GAAP earnings but not enough to fully offset the revenue strength. At the GAAP level, EPS of $2.31 beat by $0.23 while the adjusted EPS of $3.48 is up 37.5% from last year and beat the consensus by $1.00.

Looking forward, the company is expecting revenue strength to continue into the end of fiscal 2022 but there is a catch. The $1.93 to $1.98 billion in expected consolidated revenue fell short of the consensus as did EPS. The takeaway here is that the company is still growing and at a robust Pace but at a slower pace than expected and that is causing a revaluation in the market.

No Love For Helen Of Troy

Helen of Troy, despite its robust growth performance this year, has failed to snag the attention of the analysts. The stock is trading around 20X its earnings which makes it fairly valued in relation to other consumer product companies but the average rating is just a hold and the consensus target suggests the stock is fairly valued at current price levels. Add to that a high 12% short interest and it's not surprising the stock is moving lower on the weak guidance. The question now is when will the market start getting interested again?

The early price action is confirming support above the $207 mark, a mark that has been strong support several times in the past. If the market can maintain this level we expect to see the stock begin to bounce higher very soon. If not, shares of Helen of Troy may slip to the $180 level. Assuming support is able to hold at the current level, investors should expect range-bound trading with a top near $235, at least until the next earnings report anyway.