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Spectrum Brands' (SPB) Q2 Earnings & Sales Beat Estimates

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Spectrum Brands Holdings Inc. (SPB - Free Report) posted better-than-expected second-quarter fiscal 2020 results, wherein both top and bottom lines improved year over year. Results gained from the global productivity improvement plan coupled with lower expenses and growth in operating income.

Despite impressive results, management withdrew its fiscal 2020 view in response to the unprecedented impacts of COVID-19. These impacts include supply-chain disruptions at its manufacturing facilities across the Philippines, Mexico, the United States and China; significant changes in consumer behavior; and macroeconomic headwinds.

Q2 in Detail

Adjusted earnings from continuing operations of 91 cents per share surpassed the Zacks Consensus Estimate of 33 cents. The bottom line also increased more than three folds year over year, driven by operating income growth and a decline in interest expenses and shares outstanding.

Spectrum Brands’ net sales advanced 3.4% year over year to $937.8 million, exceeding the Zacks Consensus Estimate of $869 million. Excluding the negative impacts of currency and gains from acquisitions, organic net sales improved 4.1%, owing to higher sales at Home & Personal Care, Home & Garden and Global Pet Care. This was somewhat offset by sluggishness in the Hardware & Home Improvement segment. Also, impacts from COVID-19 hurt the top line to the tune of $7.5 million. Moreover, supply-chain disruptions in China led to delay in shipments, which in turn weighed on second-quarter sales.

Gross profit increased 7.7% year over year to $328.9 million. Moreover, gross margin expanded 140 bps to 35.1%, mainly driven by cash benefit stemming from retrospective tariff exclusions and rise in volumes. On the flip side, higher tariffs and currency headwinds acted as deterrents.

Furthermore, the company’s operating income surged 62.7% to $67.7 million from operating income of $41.6 million in the year-ago period.

Adjusted EBITDA from continuing operations increased 21.5% to $140.4 million in the fiscal second quarter. Further, adjusted EBITDA margin expanded 230 bps on robust gross profit and reduced operating costs.

Spectrum Brands Holdings Inc. Price, Consensus and EPS Surprise

Segmental Performance

Sales at the Hardware & Home Improvement segment edged down 0.6% to $329.1 million, mainly due to a decline in residential security, somewhat offset by growth in builders’ hardware. The segment’s organic sales dipped 0.6% year over year. Also, adjusted EBITDA at the segment grew 31.9% to $69.5 million.

Sales at the Home & Personal Care segment grew 5% to $232.7 million, backed by growth in all regions and solid performance of personal care and small appliances unit. Although temporary store closures remained a drag, strong sales in mass and online channels contributed to growth. Excluding the adverse impacts of foreign currency, organic net sales for the segment increased 7.5%. Moreover, the segment’s adjusted EBITDA of $8 million surged 77.8% on reduced operating costs, productivity improvements and higher volumes. This was partly offset by currency headwinds and higher tariffs.

The Global Pet Care segment’s sales advanced 10.2% year over year to $236.9 million, primarily driven by robust growth in companion animal and aquatic categories. Excluding the adverse impacts of foreign currency and gains from acquisitions, organic sales rose 10.6%. Further, the segment’s adjusted EBITDA grew 22% to $40 million.

The Home & Garden segment’s sales dropped 0.1% to $139.1 million. Transportation shortages stemming from the COVID-19 crisis and early season orders from robust POS in the quarter hurt the segment to some extent. This was somewhat compensated by a decline in private label and captive brand sales. Further, the segment’s adjusted EBITDA fell 4.1% to $28.4 million in the reported quarter.

Other Financials

Spectrum Brands ended the quarter with cash and cash equivalents of $457.8 million and roughly $590 million available under its $800-million Cash Flow Revolver. As of Mar 29, the company’s outstanding debt was nearly $3,042 million. In the reported quarter, capital expenditure was $13 million.

It repurchased 2.7 million shares worth $149.2 million during the quarter under review. Going ahead, management suspended its share repurchase program to strengthen the financial position. Keeping in these lines, the company withdrew its existing revolving credit facility of $800 million as part of preventive measures in the wake of the COVID-19 outbreak. On Apr 3, it added $90 million to its credit facility, which remains undrawn.

Business Development

The company concluded the sale of the European dog and cat food manufacturing operations in a deal worth more than $30 million. Also, it closed its Cambodia rawhide manufacturing facility during the quarter. Apart from these, Spectrum Brands acquired Omega Sea, which is now a part of its Global Pet Care portfolio of aquatic brands.

Looking Ahead

Although management withdrew the fiscal 2020 guidance, it expects supply shortages in the third quarter. However, the company’s strong financial position makes it well positioned to overcome the ongoing hurdle by the end of the third quarter. Going ahead, it remains focused on its global productivity improvement plan, which is likely to generate at least $100 million in run-rate savings.

Price Performance

In the past three months, shares of this Zacks Rank #4 (Sell) company have declined 28.4% against the industry’s 7.8% growth.



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