Description

Helen of Troy is a levered rollup of undifferentiated brands and was a COVID beneficiary. The rollup story is unwinding as accelerating organic revenue declines (-20% last quarter) and higher cost of capital leave the business with no capacity to buy future revenue and earnings . The company is levered 3.5x with EBITDA already declining double digits. Downside is 50%+.

Short business description:

Helen of Troy sells to retailers. The top 5 customers (Amazon, Walmart, Target) etc. account for 50% of sales.

Since 2014, HELE has deployed $1.6bn of capital into acquisitions and grew EBITDA from $150m to $230m for an unlevered pretax return of <5%. The acquisitions were often completed when organic growth began to slow, as we’ll discuss below.

1. We went back into all the filings and found that Home and Outdoor segment “growth” since FY Feb YE 2016 was the result of two one-off factors, which are now reversing.

The segment mainly consists of Oxo (food preparation, cooking, organization supplies) and Hydro Flask (water bottles, acquired in FY Feb YE 2017). Oxo was the main driver of Home and Outdoor growth since HELE acquired the company in 2004. The segment grew HSD until hitting a wall in FY2017. Kitchen organization wares go back to the days of Tupperware. There is some “innovation” around lid sealing and durability but it’s hard to argue that these are sustainable competitive advantages. There is a ton of competition. If we look at The Container Store (a popular retailer of organization goods), OXO competes with private label and influencer brands above and below its price range.

Around the time OXO growth hit a wall in early FY 2017, HELE acquired Hydro Flask.

Home and Outdoor revenues grew from $310m in FY Feb YE 2016 to $840m in FY Feb YE 2022. Let’s examine what happened in two stages: FY 2017 to FY 2020 and FY 2020 to FY 2022.

From FY 2017 to FY 2020, revenue grew from $310m to $640m. The growth was largely driven by Hydro Flask given OXO was ex-growth.

The water bottle brand became popular mainly because it was one of the first to combine several product features: color options, no plastic, great insulation, and durability. A quick google search would show that many brands can offer those benefits today. The fad peaked in late 2019 and is now past its prime. There is a ton of competition now.

On Amazon, low end water bottles cost <$25 while Hydro Flask costs $40. Yeti sits above Hydro Flask on price point in the $50-60 range. The premium category extends up to Larq at $100+. In addition, Hydro Flask is no longer a top of mind brand so no one is going to Amazon to search for Hydro Flask. It’s notable that Hydro Flask is usually not among the top results when trying different keyword searches for water bottles. It’s difficult for Hydro Flask to stand out. Our trips to Walmart and Target suggest similar issues. There are numerous brands on the water bottle shelves.

From FY Feb YE 2020 to FY Feb YE 2022, the home goods industry and outdoor industry obviously did very well. The Container Store, WSM, VSTO etc. all experienced significant comp acceleration. HELE’s Home and Outdoor segment grew mid-teens as both OXO and Hydro Flask benefited from the one time uplift.

The home goods industry and HELE numbers started turning downward in early 2022. Lo and behold, the company acquired outdoor backpack maker Osprey in late 2021 and pitched the rationale as a focus “on consumers looking to elevate their lifestyle in the higher quality market segments that also tend to have higher margins.” There are no significant synergies for a Osprey/Oxo/Hydro Flask combination. From a distribution perspective, HELE is way too small to do what CPG companies used to do to grocers against WMT/TGT/AMZN. From a product perspective, consumers obviously don’t know or care that Hydro Flask, OXO, and Osprey are owned by the same company and thus won’t be cross-sold.

In FY Feb YE 2023, this OXO and Hydro Flask momentum have collapsed. Retailers have too much of the COVID durable goods and need to right-size inventory. Organic revenue excluding Osprey were -4%, -9%, and 23% over the last three quarters.

Needless to say, Osprey’s growth will face a tough COVID comp over the next few years. Organic growth slowed from Feb quarter 2022 of 30% to 15% in the last quarter. It’ll likely trend down given commentary on other outdoor retailers.

The Home and Outdoor segment is 45% of overall revenue. It could see significant declines over the next 2 years given 1) COVID comp and 2) decline in discretionary consumer spending, especially for middle of the range brands.

2. Health and Wellness segment is an ex-growth business that benefited from the pandemic. Revenue has collapsed.

The Health and Wellness Segment (1/3 of revenue) was an ex-growth business prior to the pandemic and obviously benefited from COVID. It provides health and wellness products including healthcare devices, thermometers, water and air filtration systems, humidifiers, and fans. Brands include Pur (which is a distant competitor to Brita), Vicks (humidifier brand, zero brand value) and Braun (thermometers, nasal aspirators, pulse oximeters, etc. all categories where consumers don’t care about the brand).

Prior to the pandemic, the business grew topline 2% a year. During the pandemic, growth accelerated to 30%. Starting in mid 2021 until today, organic growth were: -33.5%, -18.6%, -.2%, -16.8%, -27.9%, -10.8%. If we generously assume that there was no pull-forward (how many thermometers do you need?), there is probably a bit more to go before it settles out at pre-pandemic levels.

3. The beauty segment was a declining business that the company tried to compensate for with the acquisition of Drybar. Hasn’t helped.

The remaining segment is beauty, which provides mass and prestige market beauty appliances including hair styling appliances, grooming tools, decorative hair accessories, and prestige market liquid-based hair and personal care products. Its brands include Hot Tools hair curling iron. This is neither a Dyson nor a generic hair styling product that one could find on Amazon for a cheap price.

Revenue declined from $500m to $380m from FY 2013 to FY 2020. They acquired Drybar in Jan 2020. This helped overall revenue for a year but the declines have continued. While Drybar was early to the blow-dry bar concept, there have since been a lot of new competition.

4. Bad quality of earnings

Adjusted EBITDA is 40% higher than EBITDA due to M&A costs, impairments, and SBC. M&A has been a core “driver” of growth so adjusting out the costs is understanding true earnings.

Furthermore, the company and bulls will point to “strong FCF generation”. However, simply using OCF – capex is missing the point. GAAP FCF excludes acquisition. Because the company’s growth is driven entirely by acquisition, excluding acquisition in FCF overstates true FCF and understates valuation. M&A spend is effectively S&M and R&D for HELE. Thus, FCF minus acquisition (amortized over time) is a better metric.

Similarly, adjusted EPS is 50-100% above GAAP EPS. Non-GAAP EPS is the wrong metric. This excludes amortization of intangibles. Amortization of intangibles is a proxy of acquisition spend (amortized over several years). Given acquisitions are a recurring part of the business (in order to grow revenue and bottom line, which then results in a real multiple on the business), amortization of intangibles is a “real” expense that cannot be adjusted out.

5. The M&A runway has ended

Capital has a price now and HELE can no longer issue cheap debt to buy assets for a <5% unlevered return. The company can no longer use M&A to hide declines in the organic business. The business has already seen significant revenue declines. These have been offset somewhat by cost cuts. Obviously, cost cutting can’t go on forever. Earnings trajectory will accelerate to the downside soon.

6. Valuation

One way to think about valuation is core business + platform value (revisit Ackman’s old decks for the latter). There is clearly no platform value for this company. The acquisitions are used to plug holes in the ex-growth core businesses and have no synergies.

What multiple of EBITDA would you put on a business that has declining revenue? MSD EBITDA? HELE currently trades at 10x adjusted fake EBITDA and 15x real EBITDA. Valuation makes zero sense. The company is levered so multiple compression will have a significant negative impact. Downside is $50 or lower.

Catalyst

Earnings