stockresearch.com commentary
Update: Helen of Troy Ltd. - (HELE) - $10.250
Late Wednesday, after the markets closed, Helen-of-Troy pre-announced a weaker than expected second quarter. Specifically, they forecast $.26 - $.28/share, versus last year's $.26/share and a consensus forecast of $.30/share. In addition, they also made a forward looking statement that full year earnings would be $1.00 - $1.05/share, obviously below the consensus forecast of $1.15/share.
The explanation, both in the press release and in my subsequent contact with management, was that sales were below expectations from some of their larger customers - Wal-Mart, K-Mart, etc... And, unfortunately the company did not have a decent explanation for the shortfall, as all the data for the quarter had yet to be analyzed.
Granted that Wal-Mart can be difficult to deal with, but it is very important to try to ascertain if the sales shortfall is a simple timing shift or more of a fundamental problem. Simply put, the second quarter is not the company's big quarter, the third quarter is. And, a continuing slowdown into the third quarter would produce a relatively flat year-over-year earnings comparison, which would lead to a lowering of sustainable long term growth rate assumptions. Unfortunately, at the moment, we simply do not have sufficient information on which to base a reasonable forecast.
The company, however, in their press release noted that they remain committed to their forecast of 15% - 20% revenue growth and greater than 20% earnings growth. Obviously some of this was to be by acquisition, given the previously announced position in General Housewares. Unfortunately Helen-of-Troy was outbid for General Housewares, but fortunately they did not let corporate vanity get in the way by making a higher bid.
Once the General Housewares deal closes, Helen-of-Troy's balance sheet will be in even better shape, and easily capable of supporting at least one, if not two, acquisitions. Assuming they maintain their acquisition criteria discipline, any acquisition should be accretive. But first, we have to get through the near term, and the near term is their big quarter.
Our problem is that our confidence has been reduced, as we do not yet have an adequate explanation for the soft sales. As more information is forthcoming, we will be able to make a more informed decision. In the meantime, valuation should support the stock, and the biggest risk at these levels appears to be dead money, unless the third quarter is truly weak.
In other words, we would continue to hold the stock, but we would not initiate new positions, or add to existing ones, until we have more information regarding the important third quarter.
Robert A. Bose |
