By no means a good quarter, but better than headline expectations. HELE with a 1Q beat on revenue and adjusted earnings. 1Q organic growth down 8% as revenue saw a benefit of ~$5mm (1%) in shipment timing from 2Q. The company reiterated its guide on revenue, adjusted earnings, and free cash flow, while taking down its full year GAAP EPS estimate by ~5%. Rate of change is net bullish in that business was less bad with organic growth accelerating from the -20% last Q, though this Q was against a much easier compare of -16% in 1Q a year ago, so an ugly 2 year trend. The big bull point really is the free cash generation with lower capex and cleaning up working capital YY; the FCF improved $224mm yy which the company used pay down debt. The working capital inflows are one time in nature. The company spent some time in Q/A talking about acquisitions, and hinting at lower multiples in the market, leaving open the possibility of a deal. The cost of capital is up, and we doubt investors want to see higher leverage on the business even if it adds some top line growth.
There are puts and takes here for the bulls and the bears. Bulls will point to the headline results, guide reiteration, and near term cash generation/deleveraging. Bears would point to the GAAP EPS trend/guide and negative organic growth with brands overearning on elevated ‘adjusted’ margins. With Walmart OXO business and strong online POS trends (Amazon) highlighted for the Q, the exposure to the big 3 (Walmart, Target, Amazon) is likely rising into the mid 40 percent range of sales. These are fine retail partners, but they generally are not good for long-term margin and cashflow characteristics given the bargaining power imbalance. The guide implies the remainder of the year still down around low to mid-single digits organically. A shrinking organic business and cost cutting doesn’t deserve this multiple even if you believe the stretch street numbers. We think the playbook that this company has been running is over, which has been leveraging a zero interest rate environment, buying assets at peaky margins, printing excess EBIT with charge-offs while underinvesting in its brands. The company focusing on improving leverage is definitely near term bullish, but ultimately to us this resembles HBI circa 2017, Newell 10 years back and Jones Apparel 15 years ago. HBI is currently trading at a 23% FCF yield on street estimates. We see a fair value for HELE around $40 to $50 with ultimate downside to $30, and we would be shorting on this squeeze.
For the full HELE Short Thesis check out our Black Book Replay Link: CLICK HERE
