HELEN OF TROY LIMITED
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with our condensed
consolidated financial statements included under Part I, Item 1., "Financial
Statements." The various sections of this MD&A contain a number of
forward-looking statements, all of which are based on our current expectations.
Actual results may differ materially due to a number of factors, including those
discussed in Part II, Item 1A.,"Risk Factors," and in the section entitled
"Information Regarding Forward-Looking Statements" following this MD&A, and in
Part I, Item 3., "Quantitative and Qualitative Disclosures About Market Risk" in
this report, as well as in Part II, Item IA., "Risk Factors" in the Company's
most recent annual report on Form 10-K for the fiscal year ended February 28,
2021 ("Form 10-K") and its other filings with the Securities and Exchange
Commission (the "SEC"). When used in this MD&A, unless otherwise indicated or
the context suggests otherwise, references to "the Company", "our Company",
"Helen of Troy", "we", "us", or "our" refer to Helen of Troy Limited and its
subsidiaries. Throughout this MD&A, we refer to our Leadership Brands, which are
brands that have number-one and number-two positions in their respective
categories and include OXO, Honeywell, Braun, PUR, Hydro Flask, Vicks, Hot Tools
and Drybar .
This MD&A, including the tables under the headings "Operating Income, Operating
Margin, Adjusted Operating Income (non-GAAP), and Adjusted Operating Margin
(non-GAAP) by Segment" and "Net Income, Diluted EPS, Adjusted Income (non-GAAP),
and Adjusted Diluted EPS (non-GAAP)," reports operating income, operating
margin, net income and diluted earnings per share ("EPS") without the impact of
acquisition-related expenses, EPA compliance costs, restructuring charges, tax
reform, amortization of intangible assets, and non-cash share-based compensation
for the periods presented, as applicable. These measures may be considered
non-GAAP financial information as set forth in SEC Regulation G, Rule 100. The
tables reconcile these measures to their corresponding GAAP-based measures
presented in our condensed consolidated statements of income. We believe that
adjusted operating income, adjusted operating margin, adjusted income, and
adjusted diluted EPS provide useful information to management and investors
regarding financial and business trends relating to our financial condition and
results of operations. We believe that these non-GAAP financial measures, in
combination with our financial results calculated in accordance with GAAP,
provide investors with additional perspective regarding the impact of such
charges and benefits on applicable income, margin and earnings per share
measures. We also believe that these non-GAAP measures facilitate a more direct
comparison of our performance to our competitors. We further believe that
including the excluded charges and benefits would not accurately reflect the
underlying performance of our operations for the period in which the charges and
benefits are incurred, even though such charges and benefits may be incurred and
reflected in our GAAP financial results in the near future. The material
limitation associated with the use of the non-GAAP financial measures is that
the non-GAAP measures do not reflect the full economic impact of our activities.
Our adjusted operating income, adjusted operating margin, adjusted income, and
adjusted diluted EPS are not prepared in accordance with GAAP, are not an
alternative to GAAP financial information and may be calculated differently than
non-GAAP financial information disclosed by other companies. Accordingly, undue
reliance should not be placed on non-GAAP information. These non-GAAP measures
are discussed further and reconciled to their applicable GAAP-based measures
contained in this MD&A beginning on page 37.
There were no material changes to the key financial measures discussed in our Form 10-K.
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Overview
We incorporated as Helen of Troy Corporation in Texas in 1968 and were
reorganized as Helen of Troy Limited in Bermuda in 1994. We are a leading global
consumer products company offering creative products and solutions for our
customers through a diversified portfolio of brands. We have built leading
market positions through new product innovation, product quality and competitive
pricing. We currently operate in three segments consisting of Housewares, Health
& Home, and Beauty.
In fiscal 2015, we launched a five-year transformational strategy designed to
improve the performance of our business segments and strengthen our shared
service capabilities. Fiscal 2019 marked the completion of Phase I of our
multi-year transformation strategy, which delivered performance across a wide
range of measures. We improved organic sales growth by focusing on our
Leadership Brands, made strategic acquisitions, became a more efficient
operating company with strong global shared services, upgraded our organization
and culture, improved inventory turns and return on invested capital, and
returned capital to shareholders.
Fiscal 2020 began Phase II of our transformation, which is designed to drive the
next five years of progress. The long-term objectives of Phase II include
improved organic sales growth, continued margin expansion, and strategic and
effective capital deployment. Phase II includes continued investment in our
Leadership Brands, with a focus on growing them through consumer-centric
innovation, expanding them more aggressively outside the United States of
America (the "U.S."), and adding new brands through acquisition. We are building
further shared service capability and operating efficiency, as well as focusing
on attracting, retaining, unifying and training the best people. Additionally,
we are enhancing and consolidating our environmental, social and governance
efforts and accelerating programs related to diversity, equity and inclusion to
support our Phase II transformation.
In fiscal 2018, we announced a restructuring plan (referred to as "Project
Refuel") intended to enhance the performance primarily in the Beauty and former
Nutritional Supplements segments. Project Refuel includes charges for a
reduction-in-force and the elimination of certain contracts. During the first
quarter of fiscal 2019, we expanded Project Refuel to include the realignment
and streamlining of our supply chain structure. We are targeting total
annualized profit improvements of approximately $10.5 million to $12.5 million
over the duration of the plan. We estimate the plan to be completed during
fiscal 2022 and expect to incur total restructuring charges of approximately
$10.3 million over the duration of the plan, of which $9.6 million have been
incurred through the third quarter of fiscal 2022. See Note 7 to the
accompanying condensed consolidated financial statements for additional
information.
Consistent with our strategy of focusing resources on our Leadership Brands,
during the fourth quarter of fiscal 2020, we committed to a plan to divest
certain assets within our Beauty segment's mass channel personal care business,
which included liquid, powder and aerosol products under brands such as Pert,
Brut, Sure and Infusium ("Personal Care"). On June 7, 2021 , we completed the
sale of our Personal Care business, not including the Latin America and
Caribbean regions, to HRB Brands LLC , for $44.7 million in cash. The net assets
sold included intangible assets, inventory, certain net trade receivables, fixed
assets and certain accrued sales discounts and allowances relating to our North
America Personal Care business. During the second quarter of fiscal 2022, we
recognized a gain on the sale in selling, general and administrative expense
("SG&A") totaling $0.5 million . We are continuing to negotiate the sale of the
Latin America and Caribbean Personal Care businesses to HRB Brands LLC , which we
expect to close no later than the end of fiscal 2022. Accordingly, we have
continued to classify the identified net assets of the Latin America and
Caribbean Personal Care businesses as held for sale. See Note 3 to the
accompanying condensed consolidated financial statements for additional
information.
Subsequent to the end of our third quarter, on
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purchase consideration, net of cash acquired, was $414.7 million in cash,
including the impact of a $5.3 million favorable customary closing net working
capital adjustment. The acquisition was funded with cash on hand and borrowings
from our existing revolving credit facility. We incurred acquisition-related
expenses of $1.6 million during the third quarter of fiscal 2022, which were
recognized in SG&A within our condensed consolidated statements of income.
Significant Trends Impacting the Business
Impact of COVID-19 InMarch 2020 , theWorld Health Organization declared the outbreak of a novel coronavirus ("COVID-19") to be a pandemic. The effects of the COVID-19 pandemic have had an unfavorable impact on certain parts of our business. The impact includes the effect of temporary closures of certain customer stores, or limited hours of operation, and materially lower store traffic, primarily during fiscal 2021. Additionally, COVID-19 has disrupted certain parts of our supply chain. Surges in demand and shifts in shopping patterns related to COVID-19, as well as other factors, have strained the global freight network, which is resulting in higher costs, less capacity, and longer lead times. These factors may impact our ability to fulfill some orders on a timely basis. Additionally, the extent of COVID-19's impact on the demand for certain of our product lines in the future will depend on future developments, including the duration, spread and intensity of the pandemic, our continued ability to source and distribute our products, as well as any future government actions affecting consumers and the global economy generally, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. Accordingly, our liquidity and financial results could be impacted in ways that we are not able to predict today. Future developments are outside of our control, are highly uncertain and cannot be predicted. If the COVID-19 impact or potential economic downturn is prolonged, then it can further increase the difficulty of planning for operations. These and other potential impacts of the current public health crisis could therefore materially and adversely affect our business, financial condition, cash flows and results of operations. Global Supply Chain and Cost Inflation Trends Surges in demand and shifts in shopping patterns related to COVID-19, as well as other factors, have continued to strain the global supply chain network, which has resulted in carrier-imposed capacity restrictions, carrier delays, and longer lead times. Demand for Chinese imports has caused shipment receiving and unloading backlogs at manyU.S. ports that have been unable to keep pace with unprecedented inbound container volume. The situation has been further exacerbated by COVID-19 illness and protocols at many port locations. Due to the backlog and increasing trade imbalance withChina , many shipping containers are not being sent back toChina , or are being sent toChina empty. With continued increases in demand for containers, limited supply and freight vendors bearing the cost of shipping empty containers, the market cost of inbound freight has increased by several multiples compared to calendar year 2020 averages. In addition to increasing cost trends, our third party manufacturing partners are not equipped to hold meaningful amounts of inventory and if shipping container capacity remains limited or unavailable, they could pause manufacturing, which could ultimately impact our ability to meet consumer demand on a timely basis. Demand for raw materials, components and semiconductor chips impacted by the supply chain challenges described above have created surges in prices and shortages of these materials may become more significant which could further increase our costs. Further, in theU.S. , the surge in demand along with COVID-19 related government stimulus and rising hourly labor wages, have created labor shortages and higher labor costs. The majority of our hourly labor is employed in our distribution centers and these factors may increase our costs and negatively impact our ability to attract and retain qualified associates. 24 -------------------------------------------------------------------------------- ` Table of Contents EPA Compliance Costs Some of our product lines within our Health & Home segment are subject to product identification, labeling and claim requirements, which are monitored and enforced by regulatory agencies, such as theU.S. Environmental Protection Agency (the "EPA"),U.S. Customs and Border Protection , theU.S. Food and Drug Administration , and theU.S. Consumer Product Safety Commission . In our quarterly report on Form 10-Q for our first quarter of fiscal 2022, we disclosed that we were in discussions with the EPA regarding the compliance of packaging claims on certain of our products in the air and water filtration categories and a limited subset of humidifier products within the Health & Home segment that are sold in theU.S. The EPA did not raise any product quality, safety or performance issues. As a result of these packaging compliance discussions, onMay 27, 2021 , we voluntarily implemented a temporary stop shipment action across this line of products in theU.S. as we worked with the EPA towards an expedient resolution. InJuly 2021 , the EPA approved modest changes to our labeling claims on packaging of existing water filtration products, which we implemented, and subsequently began shipping in limited quantities during the second quarter of fiscal 2022. The shipping volume for these products has continued to increase and, inSeptember 2021 , we returned to a more normalized level of shipping activity. InAugust 2021 , the EPA approved changes to our air filtration packaging and we implemented a repackaging plan. We began shipping limited quantities of the impacted products at the end ofAugust 2021 and returned to a more normalized level of shipping activity inNovember 2021 . We have also resolved the majority of the packaging compliance concerns on the limited subset of humidifier products and do not expect them to have a material impact on our consolidated financial results. Our consolidated and Health & Home segment's net sales revenue, gross profit and operating income for the nine months endedNovember 30, 2021 , have been materially and adversely impacted by the stop shipment actions and the time needed to execute repackaging plans after changes were approved by the EPA. While we have resumed normalized levels of shipping of the affected inventory, we are still in process of executing our repackaging plans. If we are not able to execute our repackaging plans on schedule to meet demand, our net sales revenue, gross profit and operating income could continue to be materially and adversely impacted. The extent to which net sales revenue, gross profit and operating income could be impacted will primarily depend on product demand and the duration of time required to repackage the affected inventory. In addition, our net sales revenue could be materially and adversely impacted by customer returns, an increase in sales discounts and allowances and by the potential impact of distribution losses at certain retailers. During the first quarter of fiscal 2022, we recorded a$13.1 million charge to cost of goods sold to write-off the obsolete packaging for the affected products in our inventory on-hand and in-transit as of the end of the first quarter of fiscal 2022. During the second and third quarters of fiscal 2022, we incurred additional compliance costs of$3.0 million and$4.9 million , respectively, comprised of incremental warehouse storage costs and legal fees of$2.6 million and$4.6 million , respectively, which were recognized in SG&A, and storage and obsolete packaging charges from vendors of$0.4 million and$0.3 million , respectively, which were recognized in cost of goods sold. These charges are referred to throughout this Form 10-Q as "EPA compliance costs." In addition, during the second and third quarters of fiscal 2022, we incurred and capitalized into inventory costs to repackage a portion of our existing inventory of the affected products and expect to continue to incur and capitalize such costs as we continue to repackage the remainder of the inventory during the fourth quarter of fiscal 2022. We also expect to incur additional compliance costs, which may include incremental freight, warehouse storage costs, charges from vendors, and legal fees, among other things. Such potential incremental EPA compliance costs will be expensed as incurred and could materially and adversely impact our consolidated and Heath & Home segment's gross profit and operating income. Additional impacts or more pronounced adverse impacts may arise that we are not currently aware of today. Accordingly, our business, results of operations and financial condition could be adversely and materially impacted in ways that we are not able to predict today. At this time, we are not aware of any fines or penalties related to this matter imposed against us by the EPA. While we do not anticipate material fines or penalties, there can be no assurances that such fines or penalties will not be imposed. 25 -------------------------------------------------------------------------------- `
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See Note 8 to our condensed consolidated financial statements for additional information and Part II, Item 1A., "Risk Factors" in this Form 10-Q for additional information on our related material risks.
Potential Impact of Tariffs Since 2019, theOffice of the U.S. Trade Representative ("USTR") has imposed, and in certain cases subsequently reduced or removed, additional tariffs on products imported fromChina . We purchase a high concentration of our products from unaffiliated manufacturers located inChina . This concentration exposes us to risks associated with doing business globally, including changes in tariffs. Any alteration of trade agreements and terms betweenChina and theU.S. , including limiting trade withChina , imposing additional tariffs on imports fromChina and potentially imposing other restrictions on exports fromChina to theU.S. may result in further and/or higher tariffs or retaliatory trade measures byChina . Furthermore, in certain cases, we have been successful in obtaining tariff exclusions from the USTR on certain products that we import. These exclusions generally expire after a designated period of time. In the case that a tariff exclusion is not granted or extended, higher tariffs would be assessed on the related products. Foreign Currency Exchange Rate Fluctuations Due to the nature of our operations, we have exposure to the impact of fluctuations in exchange rates from transactions that are denominated in a currency other than our functional currency (theU.S. Dollar). Such transactions include sales, certain inventory purchases and operating expenses. The most significant currencies affecting our operating results are the British Pound, Euro, Canadian Dollar, and Mexican Peso. For the three months endedNovember 30, 2021 , changes in foreign currency exchange rates had a favorable year-over-year impact on consolidatedU.S. Dollar reported net sales revenue of approximately$1.2 million , or 0.2%, compared to$1.7 million , or 0.4% for the same period last year. For the nine months endedNovember 30, 2021 , changes in foreign currency exchange rates had a favorable year-over-year impact on consolidatedU.S. Dollar reported net sales revenue of approximately$8.8 million , or 0.6%, compared to an unfavorable impact of$3.2 million , or 0.3% for the same period last year. Consumer Spending and Changes in Shopping Preferences Our business depends upon discretionary consumer demand for most of our products and primarily operates within mature and highly developed consumer markets. The principal driver of our operating performance is the strength of theU.S. retail economy. Approximately 79% and 80% of our consolidated net sales revenue was fromU.S. shipments during the three month periods endedNovember 30, 2021 and 2020, respectively. For the nine month periods endedNovember 30, 2021 and 2020,U.S. shipments were approximately 77% and 79% of our consolidated net sales revenue. Our concentration of sales reflects the evolution of consumer shopping preferences to online or multichannel shopping experiences. Our net sales to retail customers fulfilling end-consumer online orders and online sales directly to consumers comprised approximately 23% and 22% of our total consolidated net sales revenue for the three and nine month periods endedNovember 30, 2021 , respectively, and both declined approximately 7%, compared to the same periods in the prior year. For the three and nine month periods endedNovember 30, 2020 , our net sales to retail customers fulfilling end-consumer online orders and online sales directly to consumers comprised approximately 24% and 25%, respectively, of our total consolidated net sales revenue, and grew approximately 34% and 33%, respectively, compared to the same periods in the prior year. With the continued growth in online sales across the retail landscape, many brick and mortar retailers are aggressively looking for ways to improve their customer delivery capabilities to be able to meet customer expectations. As a result, it will become increasingly important for us to leverage our distribution 26 -------------------------------------------------------------------------------- ` Table of Contents capabilities in order to meet the changing demands of our customers, as well as to increase our online capabilities to support our direct-to-consumer sales channels and online channel sales by our retail customers. Variability of the Cough/Cold/Flu Season Sales in several of our Health & Home segment categories are highly correlated to the severity of winter weather and cough/cold/flu incidence. In theU.S. , the cough/cold/flu season historically runs from November through March, with peak activity normally in January to March. The 2020-2021 cough/cold/flu season experienced historically low incidence levels due to COVID-19 prevention measures including mask-wearing, remote learning, work from home, and reduced travel, brick and mortar shopping, and group gatherings. For the 2019-2020 season, cough/cold/flu incidence was slightly higher than the 2018-2019 season, which was a below average season. 27 -------------------------------------------------------------------------------- ` Table of Contents RESULTS OF OPERATIONS
The following tables provide selected operating data, in
Three Months Ended November 30, % of Sales Revenue, net
(in thousands) 2021 2020 $ Change % Change 2021 2020
Sales revenue by segment, net
Housewares $ 246,135 $ 222,400 $ 23,735 10.7 % 39.4 % 34.9 %
Health & Home 203,900 250,158 (46,258) (18.5) % 32.6 % 39.2 %
Beauty 174,849 165,179 9,670 5.9 % 28.0 % 25.9 %
Total sales revenue, net 624,884 637,737 (12,853) (2.0) % 100.0 % 100.0 %
Cost of goods sold 351,051 350,410 641 0.2 % 56.2 % 54.9 %
Gross profit 273,833 287,327 (13,494) (4.7) % 43.8 % 45.1 %
SG&A 183,788 186,630 (2,842) (1.5) % 29.4 % 29.3 %
Restructuring charges 5 (12) 17 * - % - %
Operating income 90,040 100,709 (10,669) (10.6) % 14.4 % 15.8 %
Non-operating income, net 52 93 (41) (44.1) % - % - %
Interest expense 3,206 2,926 280 9.6 % 0.5 % 0.5 %
Income before income tax 86,886 97,876 (10,990) (11.2) % 13.9 % 15.3 %
Income tax expense 11,203 13,721 (2,518) (18.4) % 1.8 % 2.2 %
Net income $ 75,683 $ 84,155 $ (8,472) (10.1) % 12.1 % 13.2 %
Nine Months Ended November 30, % of Sales Revenue, net
(in thousands) 2021 2020 $ Change % Change 2021 2020
Sales revenue by segment, net
Housewares $ 654,997 $ 564,891 $ 90,106 16.0 % 39.9 % 35.5 %
Health & Home 549,475 661,568 (112,093) (16.9) % 33.5 % 41.6 %
Beauty 436,863 362,965 73,898 20.4 % 26.6 % 22.8 %
Total sales revenue, net 1,641,335 1,589,424 51,911 3.3 % 100.0 % 100.0 %
Cost of goods sold 936,322 892,460 43,862 4.9 % 57.0 % 56.1 %
Gross profit 705,013 696,964 8,049 1.2 % 43.0 % 43.9 %
SG&A 482,467 439,646 42,821 9.7 % 29.4 % 27.7 %
Restructuring charges 380 355 25 7.0 % - % - %
Operating income 222,166 256,963 (34,797) (13.5) % 13.5 % 16.2 %
Non-operating income, net 185 440 (255) (58.0) % - % - %
Interest expense 9,508 9,568 (60) (0.6) % 0.6 % 0.6 %
Income before income tax 212,843 247,835 (34,992) (14.1) % 13.0 % 15.6 %
Income tax expense 28,873 16,061 12,812 79.8 % 1.8 % 1.0 %
Net income $ 183,970 $ 231,774 $ (47,804) (20.6) % 11.2 % 14.6 %
* Calculation is not meaningful.
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Third Quarter Fiscal 2022 Financial Results
•Consolidated net sales revenue decreased 2.0%, or $12.9 million , to $624.9
million for the three months ended November 30, 2021 , compared to $637.7 million
for the same period last year.
•Consolidated operating income decreased 10.6%, or $10.7 million , to $90.0
million for the three months ended November 30, 2021 , compared to $100.7 million
for the same period last year. Consolidated operating margin decreased 1.4
percentage points to 14.4% of consolidated net sales revenue for the three
months ended November 30, 2021 , compared to 15.8% for the same period last year.
•Consolidated adjusted operating income decreased 5.2%, or $5.8 million , to
$106.1 million for the three months ended November 30, 2021 , compared to $111.9
million for the same period last year. Consolidated adjusted operating margin
decreased 0.6 percentage points to 17.0% of consolidated net sales revenue for
the three months ended November 30, 2021 , compared to 17.6% for the same period
last year.
•Net income decreased 10.1%, or $8.5 million , to $75.7 million for the three
months ended November 30, 2021 , compared to $84.2 million for the same period
last year. Diluted EPS decreased 7.2% to $3.10 for the three months ended
November 30, 2021 , compared to $3.34 for the same period last year.
•Adjusted income decreased 4.4%, or $4.1 million , to $90.6 million for the three
months ended November 30, 2021 , compared to $94.8 million for the same period
last year. Adjusted diluted EPS decreased 1.1% to $3.72 for the three months
ended November 30, 2021 , compared to $3.76 for the same period last year.
Year-To-Date Fiscal 2022 Financial Results
•Consolidated net sales revenue increased 3.3%, or
•Consolidated operating income decreased 13.5%, or$34.8 million , to$222.2 million for the nine months endedNovember 30, 2021 , compared to$257.0 million for the same period last year. Consolidated operating margin decreased 2.7 percentage points to 13.5% of consolidated net sales revenue for the nine months endedNovember 30, 2021 , compared to 16.2% for the same period last year. •Consolidated adjusted operating income decreased 3.1%, or$9.0 million , to$282.5 million for the nine months endedNovember 30, 2021 , compared to$291.5 million for the same period last year. Consolidated adjusted operating margin decreased 1.1 percentage points to 17.2% of consolidated net sales revenue for the nine months endedNovember 30, 2021 , compared to 18.3% for the same period last year. •Net income decreased 20.6%, or$47.8 million , to$184.0 million for the nine months endedNovember 30, 2021 , compared to$231.8 million for the same period last year. Diluted EPS decreased 17.7% to$7.52 for the nine months endedNovember 30, 2021 , compared to$9.14 for the same period last year. •Adjusted income decreased 5.5%, or$14.0 million , to$240.9 million for the nine months endedNovember 30, 2021 , compared to$254.9 million for the same period last year. Adjusted diluted 29 -------------------------------------------------------------------------------- `
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EPS decreased 2.0% to
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