Helen Of Troy: Solid Business With A Depressed Valuation (NASDAQ:HELE)

Introduction and thesis

Helen of Troy Limited (NASDAQ:HELE) is a global consumer products company headquartered in Hamilton, Bermuda. The company operates through three main segments: Housewares, Health & Home, and Beauty. Helen of Troy designs, develops, and markets a diverse portfolio of consumer products under various brand names, serving both domestic and international markets.

HELE is a fundamentally strong business, owing to incremental operational improvements by Management in conjunction with gradual commercial development. The company operates a range of leading brands, within which it has progressively created and innovated. Further, it has acquired a range of businesses and brands to supplement its portfolio.

Whilst HELE is facing near-term headwinds due to economic conditions, HELE’s current valuation sufficiently prices this in. The company is trading at an FCF yield of ~9%, which could allow for considerable distributions or investment in growth (through M&A). This optionality de-risks the business. The underlying quality is there, with strong brands and consistent margins. Whilst there will be near-term pain, HELE should navigate this without commercial issues.

Share price

HELE’s share price performance has broadly been strong during the last decade, matching or exceeding the S&P500. This changed post-2020, with a considerable decline (>50%).

This is a reflection of a reversal in financial performance following a period of supreme consistency, threatening its long-term trajectory.

Commercial analysis

Presented above are HELE’s financial results.

HELE’s revenue growth has been consistent, with a Linearity to time of 0.8, albeit at a modest rate of +4%. EBITDA has broadly tracked this, with a CAGR of +5%.

Business Model

HELE operates a diversified portfolio of global brands across multiple consumer product categories, including personal care, household, and health and home. Some of its well-known brands include OXO, Hydro Flask, Vicks, Braun, and Revlon.

This diverse brand portfolio has allowed the company to achieve consistent growth through a combination of diversification and broadening its market reach. The company has emphasized innovation in product development, focusing on creating innovative, high-quality products that address changing consumer needs, while also progressively improving.

HELE distributes its products through a diverse range of channels, including e-commerce, brick-and-mortar retail, specialty stores, and direct-to-consumer channels. The company leverages its strong relationships and brands to ensure maximum presence in both domestic and international markets.

HELE pursues strategic acquisitions and partnerships to enhance its brand portfolio, expand its market reach, and drive growth. In the last decade, the company has spent ~$1.3b. We believe this is an important component of its growth strategy, given the maturity of its industries will limit organic growth potential.

Competitive Positioning

The company operates similarly to consumer goods businesses, with market-leading brands that generally boast consistent interest in society. This allows for consistent demand, with growth aligning with inflation and specific industry dynamics. HELE’s strategic marketing initiatives effectively communicate brand messages, drive product awareness, and maintain its broader image among new audiences.

We believe HELE will continue to enjoy strong brand recognition and loyalty among consumers. This brand equity translates into increased consumer trust, preference, and repeat purchases, driving revenue growth across its product categories.

The company’s innovative advantage has enabled it to develop differentiated products. The key concern for HELE is that as it optimizes its cost base (discussed later), it could face increased competition through innovation. An example of this would be how SharkNinja (SN) has rapidly gained market share in established industries through competitive pricing and innovation.

Growth and margin progression

HELE’s presence across multiple product categories and distribution channels diversifies its revenue streams and reduces dependency on any single market segment or channel. This diversification strategy provides stability and resilience in its revenue, enabling the company to weather market fluctuations and economic downturns.

As highlighted, its brand strength alongside this diversification should allow for consistent growth to continue, although we are concerned that it will struggle beyond this. Gains from innovation have slowed and M&A is increasingly being relied on to push growth beyond the rate of inflation.

Current economic conditions represent near-term headwinds for consumer industries, primarily due to the cost of living issues caused by elevated rates and inflation. Consumers are prioritizing core spending, which has seen a considerable increase in costs, contributing to reduced spending in discretionary segments.

Wage inflation and a sticky labor market have allowed for resilience, albeit consumer spending has still been broadly flat and heavily driven by price rather than volume.

We expect the first half of 2024 (at a minimum) to be a continuation of the current conditions, with an improvement subsequently as rates begin to decline and expansionary policy returns.

HELE’s recent performance has been weak, with top-line growth of (16.7)%, (6.6)%, (5.7)%, and (1.6)%. In conjunction with this, margins have stabilized, with EBITDA-M up +1ppt compared to FY23.

The company’s inventory turnover has declined from an average of ~3x to 2.3x, reflecting reduced demand and an inability to move stock quickly without discounting. This is not an immediate issue currently, although could quickly act as a strain on cash flows.

This is primarily a reflection of economic conditions, with a decline in demand for hair appliances, humidification, and air filtration products in particular. The discretionary and premium nature of these products likely lends themselves to weaker demand.

Management is seeing trends improve, albeit this will be against lower comparables. We are not overly concerned, particularly as inflationary pressures on costs decline and allow for margin improvement.

HELE’s margins have gradually, but consistently improved during the last decade. This has been driven by a focus on operational efficiency and cost optimization. By streamlining processes, optimizing its supply chain, and controlling costs, Management has maximized profitability and allowed for reinvestment of resources into growth initiatives. GM% is up 7ppts since FY14, allowing for increased S&A spending (+2ppts of Revenue) that delivered growth.

Management understood it operated strong brands and benefited from growth in its core industries, thus turning focus to margin improvement as a means of overall business development.

Presented above is Wall Street’s consensus view on the coming years.

Analysts are forecasting mild growth in the coming 3 years (+2% CAGR), alongside incremental margin improvement. Given the limited growth levers available to Management, while there is a track record for margin improvement, we consider these forecasts reasonable.

HELE’s performance has tracked analyst estimates, although has broadly exceeded estimates by a small degree. This supports the accuracy of analysts’ forecasting methodology.

Balance sheet & Cash Flows

HELE is reasonably financed, with a ND/EBITDA ratio of 2.3x. At this level, the business does not have the ability to conduct transformational M&A, albeit can spend ~250-500m on acquisitions so long as it focuses on deleveraging soon after (similar to how it is operating now). This does give us pause, as it means Management cannot considerably invest in growth, particularly if it also wants to invest in distribution.

Management’s capital allocation has allowed for value appreciation, which is likely a reason for the slower approach to growth by Management.

Industry analysis

Presented above is a comparison of HELE’s growth and profitability to the average of its industry, as defined by Seeking Alpha (5 companies).

HELE performs well relative to its peers, with considerably better margins and slightly better growth. This reflects the strength of its brand primarily we feel, allowing for premium pricing. The growth, we feel, is more a reflection of the weakness in the peer group rather than anything exceptional by HELE.

Valuation

HELE is currently trading at 12x LTM EBITDA and 10x NTM EBITDA. This is a discount to its historical average.

A discount to its decade-average appears unjustifiable in our view. Its EBITDA-M has declined back to its decade average, while we believe growth of ~2-4% is sustainable going forward. This is not materially different from its decade-average position, while having the potential upside for further margin/FCF improvement. We would conservatively suggest its fair value is at its decade-average, implying upside on an EBITDA basis of ~16-22%.

Further, HELE is trading at a small premium to its peers on an LTM EBITDA basis (~14%) and a discount on an LTM P/E basis (~19%). Given the superior FCF and ROTC, alongside growth, we believe a substantial premium is justifiable. We would suggest closer to ~25-35%, implying upside of ~10-15% on an EBITDA basis.

Finally, while HELE’s FCF and EBITDA have recovered, its share price has not. The three should broadly be moving in parallel, with its share price now disjointed. This potentially suggests short-term upside.

Overall, we believe HELE is undervalued, suggesting negative investor sentiment in the consumer segment has contributed to it being oversold. While the near-term may be difficult, we see sufficient upside.

Management

HELE’s CEO, who contributed heavily to its impressive story during the last decade is retiring imminently. The company has also recently replaced its CFO.

This is a considerable disruption for a short period and will likely mean a strategic shift. Whilst the jury is still out, we would like to see a refocus on growth.

Key risks with our thesis

The risks to our current thesis are:

• Pricing pressure from new entrants impacting margins.
• Supply chain disruptions.
• Failed M&A.

Final thoughts

HELE is a solid business in our view. The company, whilst not growing considerably, is highly profitable and performing consistently. We believe it can maintain its current trajectory, with scope for improvement.

Its valuation is heavily depressed, pricing in any risks associated with revitalizing growth. For this reason, despite near-term headwinds, we are the stock a buy.