Perrigo reported Q3 EPS of $.64 vs. consensus expectations of $.63. Revenue grew 0.1% in constant currencies, with organic sales declining 1.2% compared to +0.8% sequentially. Global sales of cough, cold, and pain products grew 7%, with a strong sell-in offsetting a slow start to the cough/cold season in the U.S.
- CSCA's constant currency sales decreased by 2.6%. Organic sales declined 5.1% vs. -2.7% sequentially. The discontinuation of low-margin SKUs, normalizing consumer consumption, and comparing against an early cough/cold season last year was a 3.6% headwind. Store brand OTC share grew in sales and volumes in the last 13 weeks, gaining 70bps of share. Responding to FDA letters and updated guidelines has resulted in Perrigo performing more major cleanings of the facilities. This has led to lower production, higher unit costs, lower near-term inventory levels, and lost sales, totaling an estimated $.35 EPS headwind compared to previous expectations. Perrigo anticipates the infant formula business to normalize by the middle of next year.
- CSCI's constant currency sales increased 5.2%. Organic sales increased 6.2% vs. +7.1% sequentially. Nearly all of the product categories grew YOY in constant currencies except VMS and women’s health.
Gross margins expanded by 300bps from 220bps sequentially. Higher pricing and the benefits of the SKU rationalization were the drivers. The supply chain reinvention program added 70bps. CSCA's gross margins expanded by 430bps due to pricing, portfolio reductions, and the infant formula acquisition. CSCI gross margins contracted 120bps due to an unfavorable mix, with the UK store brand business outpacing the segment. Management originally thought gross margins could recover to 40% by 2025 (as seen in the slide from the analyst day below), but now the internal expectations are to surpass that goal. EBIT margins expanded by 130bps. CSCA's operating margins expanded by 90bps. CSCI's operating margins expanded by 250bps, boosted partially by lower advertising and promotional spending.
Management lowered the top end of revenue and EPS guidance for the year. Revenue guidance was lowered from 7-11% growth to 4-6%, while organic revenue growth was lowered from 3-6% to 1-3%. EPS guidance was lowered from $2.50-2.70 to $2.50-2.60. The revisions reflect a larger Fx headwind and the impact of the FDA’s recent actions on infant formula. We are mindful of modeling Q1 with the infant formula challenges.
In recent years, there has been considerable doubt the company could recapture lost margins. The SKU rationalization efforts, along with higher prices, have demonstrated the margin recovery. The infant formula business has had several challenges since the FDA shut down a major plant and created a national shortage. Perrigo made a couple of strategic moves to improve its competitive position, only to see the FDA modify the industry’s practices. Importantly, the $.35 EPS hit from those changes is not a permanent impairment, but a one-time impact.
