This HELE print left us with more questions than answers, which is why we’re calling an audible and will be presenting a Black Book next Friday, January 13th at 10am. Details to follow. The initial headline showed exactly what the company wanted to show you – a headline beat -- $2.75 vs the Street at $2.60. But these are non-GAAP numbers, which is one of our beefs with this company. GAAP EPS came in at $2.15, or 30% below the $3.10 GAAP EPS in the same quarter last year. Organic sales were down 18.5%, which was simply stunning, and proves our point that this company is simply not good at running businesses. To its credit, International (22% of revenue) was +15% in the quarter, but that makes the US portion look even worse. HELE management’s ‘schtick’ is that it’s good at using a zero interest rate environment to buy mediocre brands, which subsequently roll, and then it uses accounting gimmicks to focus the Street on non-GAAP earnings. That ship has sailed. Rates are permanently elevated, the company is (on our next year estimates) 3.2x levered, and can no longer execute on its core competency of deal binging and ‘creative accounting’. That means non-GAAP earnings revert to GAAP earnings while core brands continue to lose share. In the Q&A management noted that Hydroflask has been flat for 4-years, which is amazing given the popularity personal water bottles over the past three years. Simply put, even in the hottest categories where it has a semi-relevant brand, the company is losing share. In virtually every category (which we’ll review in our Black Book next week) there is a premium competitor taking share at the high end, and a host of lower end brands taking share at the bottom. HELE’s portfolio – with very few exceptions – is stuck in the middle. Not where you want to be, especially when over 40% of sales come from Amazon, WalMart and Target, the latter two of which should dramatically de-stock in 2023 after being in the worst inventory position in 2022 out of any year in decades.
The big news on the call was the consolidation, restructuring, and layoffs of 10% of the workforce. The consolidation will affect the current beauty segment and the current health and wellness segment, they will be combined to become the beauty and wellness segment. The restructuring affects the global operations and finance that will now be more centralized and results in the 10% reduction of employees. All of these actions are with the goal to reduce costs and improve centralization and efficiency of the organization. The goal is to have healthier inventories and more aligned sell-ins and sell-throughs. Not sure we agree that will be the result, but golf clap to the company for trying. To the company’s credit, we thought the biggest positive was inventories, down 8% this quarter, despite inclusion of the Osprey acquisition that was not in last year’s 3rd quarter.
HELE largely kept the full year intact as it relates to guidance. It should have taken down fiscal '24 (calendar 2023) – a lot. We think that the TAIL earnings power at this company is well below $5 per share, not the $12 that the Street is currently underwriting and that the stock is valued upon. Again, the core competency of this company is officially dead. Despite management saying that it’s still looking for acquisitions (but said it’s getting more ‘picky’), we think the acquisition story is over. Now it has to run these businesses profitably, and grow brands that are stuck between a rock and a hard place as it relates to the consumer value proposition. That’s just not what HELE does well. We think that over a TAIL duration, this stock will trade at a mid-high single digit multiple on sub-$5 in EPS (or 3-4x EBITDA), which is good for a stock near $30 – a far cry from the $110 it’s trading at today. There’s no such thing as a perma-short, but this is as close to one as we can currently find, and think that it will begin to unravel in short order as GDP goes negative in 1H23.
We’ll follow up with details on our Black Book for next Friday. Hope you can join us. This one is worth doing the work on…
