Editor’s Note: You asked for more stock reports! We're delivering a bunch of those to you today. Watch your inbox. As we refine our stock report process, we’d like your feedback on the Stock Report below. Again, if a write-up of each stock on Investing Ideas is valuable to you, let us know. Feedback about the stock report’s length or the content is also welcome.
This report was generated using published research from our Retail team led by Sector Head Brian McGough.
As some companies generate investor returns from anticipated success, the same can be said about faulty companies on the brink of collapse. Helen of Troy (HELE) is facing impending doom. This isn’t all about the numbers; it’s about tragic missteps in an evolving market, ‘creative’ accounting, and a reality that’s catching up fast.
Company Breakdown: Helen of Troy engages in the manufacturing and distribution of personal care and household products. Its Beauty & Wellness segment makes up 55.8% of sales while Home & Outdoor make up 44.2%. its major brands include OXO, Hydro Flask, Osprey, Honeywell, Vicks, Revlon, among others.
The Short Case
"Creative" Accounting Practices: HELE commonly uses deceptive non-GAAP earnings, which consistently overshadow more stringent GAAP earnings. The significant divergence between these two metrics, with GAAP EPS being upwards of 50%+ lower than the adjusted numbers presented to the market, is a clear indication of 'creative' accounting. Such practices, including the consistent addition of special charges and non-operational items, and stock-based compensation to enhance non-GAAP figures, are not sustainable in the long term. This approach, as evidenced by the persistent spread between GAAP and non-GAAP earnings, paints a misleading picture of the company's financial health and operational efficiency.
Declining Brand Strength & Market Share: HELE's portfolio is experiencing a significant loss in market share. Operating in high growth potential sectors, the company nonetheless faces a troubling trend with its organic sales declining by high single digits year to date. This downturn is even more concerning considering it is occurring against the backdrop of relatively easy comparisons. Additionally, approximately 42% of HELE's sales come from major retailers such as Walmart, Target, and Amazon, which are increasingly prioritizing their own premium and private label brands. This shift in retailer focus intensifies the competitive landscape and further erodes HELE's market position, challenging the company's ability to maintain its once strong brand presence in these key areas.
Disappoint Forward Outlook: The company's 'stuck in the middle' brand positioning fails to effectively cater to either the premium or budget segments of the market. Additionally, the company's reliance on major retailers like Walmart, Target, and Amazon, which contribute to 42% of its sales, places HELE in a vulnerable position as these retailers shift focus towards premium brands and their own private labels, further diminishing their brand equity and consumer appeal.
Risk Considerations
A company with a track record of market share loss, like HELE, is subject to easy comparisons from previous years, making it feasible to occasionally exceed earnings forecasts despite underlying business weaknesses. For HELE, this is a pertinent risk, especially considering its high short interest. The company's pattern of underperforming brands, including OXO, Hydro Flask, Honeywell, Vicks, and Revlon, and its declining organic sales (trending down high single digits year-to-date against easy compares) could lead to misleadingly favorable earnings reports. Such unexpected beats, even if driven by poor-quality earnings, could trigger painful short squeezes for investors holding short positions. This risk is compounded by the company's history of 'creative' accounting practices, which may further obscure its true financial health and artificially inflate stock performance in the short term.
Outlook & Conclusion
Our analysis leads us to project a substantial 70% decrease in HELE's share price over a TAIL duration, within the next three years or less. This prediction stems from the company's extensive use of aggressive adjusted EPS accounting, arguably among the most extreme in the consumer sector. HELE's management has consistently employed 'creative' accounting practices, such as adding back stock-based compensation, amortization of intangibles, and restructuring charges, to artificially enhance its earnings reports. Additionally, the company's strategy during the past zero-interest rate environment to acquire a range of average, non-synergistic brands has backfired, leading to a significant decline in overall brand strength and market share. This is evident in the high single-digit year-to-date decline in organic sales and loss of market share across its major brands, including OXO, Hydro Flask, and Revlon. The way we see it, HELE is a melting ice cube, and it’s only a matter of time until the heat gets cranked up.
Appendix: Definitions of Key Financial Terms
- GAAP (Generally Accepted Accounting Principles): A set of accounting standards and procedures used in the United States to ensure consistency in financial reporting.
- Non-GAAP Earnings: Financial performance measures that exclude certain expenses or income streams that are included in GAAP earnings. These adjustments are often made to omit one-time, irregular, or non-operational factors.
- EPS (Earnings Per Share): A company's profit divided by its number of outstanding shares of common stock, indicating the company's profitability on a per-share basis.
- Adjusted EPS: A version of EPS that adjusts the net income for various non-recurring items to provide a clearer picture of the company's ongoing profitability.
- Organic Sales: Revenue generated from a company’s existing operations as opposed to revenue from newly acquired businesses or other external sources.
