Q2 2023 Helen of Troy Ltd Earnings Call
Greetings and welcome to the Helen of Troy Limited second quarter fiscal 2023 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like turn the conference over to your host Jack Johnson Senior Vice President corporate business development for Helen of Troy. Please go ahead Sir.
Thank you operator, good morning, everyone and welcome to Helen of Troy's second quarter fiscal 2023 earnings Conference call.
On the call today with me are Julien Lindbergh, our CEO , Matt Osborne, our CFO and our CLO allows you block.
The agenda for the call. This morning is as follows I'll begin with a brief discussion of forward looking statements.
Julian Lindbergh the company's CEO will comment on the financial performance of the quarter and current trends then Mr. Matt Osborne the company's CFO will review the financials in more detail and provide an update on our financial outlook for fiscal 2023.
Following this we will take questions you have for us today.
This conference call may contain certain forward looking statements, they're based on management's current expectation with respect to future events or financial performance generally the words anticipates believes expects and other words similar words identifying forward looking statements.
We're looking statements are subject to a number of risks and uncertainties that could cause anticipated results to differ materially from the actual results.
This conference call May also include information that may be considered non-GAAP financial information. These non-GAAP measures are not an alternative to GAAP financial information and may be calculated differently than the non-GAAP financial information disclosed by other parties.
The company cautions listeners not to place undue reliance on forward looking statements or non-GAAP financial information.
Before I turn the call over to Mr. <unk> I would like to inform all interested parties that a copy of today's earnings release has been posted to the Investor Relations section of the call.
These website at www dot some of the Detroit Dot com.
The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP based measures. The release can be obtained by selecting the investor Relations tab on the company's homepage and then the press releases tab.
I will now turn the conference call over to Mr. Middleburg.
Thank you Jack good morning, everyone and thank you for joining us today.
Today, I would like to talk about our second quarter results. The changes we see in trends since our July call. The various factors leading to our revised outlook for this fiscal year and provide an update on our progress on the initiatives we announced in July .
As a reminder, those initiatives were to normalize our elevated inventory levels.
Launched a new corporate program to further improve our productivity and lower our costs and move faster on several strategic changes and efficiency projects that we've identified in our health and wellness segment.
Let me start with that update.
Over the summer we built these initiatives into an overall restructuring projects, we are calling Pegasus.
Basic idea I guess this is to significantly accelerate and amplify our transformation to provide a stronger platform for operating margin expansion reduced.
Reduced inventory raised return on invested capital and improve cash flow.
I guess this is a multi year initiative with a three year arc designed not only to improve profitability, but also help us more efficiently leverage our investment flywheel.
As peg at this generates savings we plan to invest a portion of those savings back into the business under our new and leaner cost structure.
The timing and extent of the reinvestment will depend on the future macro conditions and on the opportunities that provide the most attractive return on investment.
We believe this will also help generate more profitable growth once consumers patterns of consumption normalize and once retailer replenishment better aligns with sell through.
We came into the current environment with considerable momentum and outstanding portfolio of leadership brands outstanding people and a powerful positive culture.
Like many other companies we are addressing the difficult short term macro deterioration and in our case, we are simultaneously and purposefully focusing on Pegasus to significantly improve what is within our control.
This theory team is being led by our C O O Noel's Jaguar with the support of a premium global consulting firm as well as a dedicated internal core team.
Strategically I guess this is intended to return Helen of Troy to the top quartile of our peer group on measures such as revenue and earnings per share growth ash.
Cash flow generation and total shareholder return.
He initiatives and package. This include optimizing our brand portfolio.
Accelerating and amplifying cost of goods savings projects.
Enhancing the efficiency of our supply chain network.
Optimizing our indirect spending.
Streamlining and simplifying the organization.
Reducing our inventory.
I guess this will also include initiatives to improve margins growth rates and brand portfolio in health and wellness.
I am very confident that the major projects that make up the Pegasus are the right ones.
Starting with our brand portfolio, we have demonstrated our willingness to exit underperforming businesses, such as mass market personal care. When they are no longer right for our long term portfolio profitability and growth targets.
This includes a further look at our businesses through this lens.
On the acquisition side, we have demonstrated our ability to deploy or redeploy capital on acquisitions that add fast growing brands and on trend categories.
Recent examples include the ones made so far in phase two osprey, Karl Smith, and dry bar and are delivering on our strategy to further diversify our portfolio in outdoor and in prestige beauty.
The cost of goods savings projects and Pegasus are intended to amplify and accelerate work already underway and identify new opportunities to better leverage our scale in procurement supplier consolidation and platforming technologies more rapidly and at lower cost.
I guess, there's projects in other parts of our supply chain are intended to move faster on streamlining our distribution network and footprint.
This will lower cost free up capital and accelerate our ability to capture the efficiencies of the state of the art automation and it systems and our new distribution center.
Selling down our elevated inventory of certain existing products will also contribute to capturing these efficiencies.
The net effect of the supply chain and inventory changes will make a big difference to how quickly we can improve working capital and increase cash flow.
The Pegasus initiatives on optimizing indirect spend will help us standardize and simplify it in additional spend areas such as marketing similar to what we've already done in I T and in other areas.
The next round of optimization will also allow us to reapply best practices more quickly.
Our leverage purchasing power across business units and further increase our focus on return on investment.
By streamlining our organization, we believe we will be able to create further operating efficiencies through selective centralization that more easily allows us to leverage our scale prioritize investment decisions across our business and shift resources to the brands and projects. We expect we will have the greatest positive impact for our consumers and for our reach.
Rail customers.
[noise] streamlining is also intended to help enhance our speed collaboration and re application of best practices as we get more leverage and further centralizing our shared services and three our business units to focus on even more consumer centric innovation and brand building.
Turning now to look at the quarter. Despite the current challenges. We are pleased to report revenue growth and adjusted earnings per share in line with the quarterly outlook, we provided in July .
Stepping back to look at the first half of the fiscal year. We believe it is important to note that even with the various ups and downs from the pandemic over the past two and a half years and the EPA matter.
Sales of our portfolio of organic and acquired leadership brands grew 40% in the first half of this fiscal year compared to the fiscal 2020 pre pandemic ear.
As discussed in our April and July earnings calls, we saw a notable change in consumer buying patterns beginning this March and April .
This trend continued throughout the second quarter accelerating in some categories, resulting in a larger overall slowdown in demand than we expected in our organic business.
Consumers further tightened their purchasing patterns in some categories in response to higher than expected inflation on basics, such as rent gasoline and food and the impact of higher than expected interest rates rippling through the global economy.
As a result of these changes in consumer purchase habits, most retailers slowed their repurchase orders and further adjusted their inventories and weeks on hand to match reduced sell through.
Within our diversified portfolio, we can see consumers generally trading down or delaying purchases in some discretionary categories, such as beauty appliances and home related categories.
With our portfolio intentionally built to focus on the better and best segments changing consumer purchase habits. It had an outsized negative impact on our revenues and market share in those categories.
In some cases, our brands are a beneficiary of trade down such as infant monitors were sales of Vicks thermometers were strong in the second quarter and we grew market share significantly as consumers sought quality products from trusted brands, whose lineups include lower priced alternatives.
Other discretionary categories, such as outdoors and prestige beauty liquids are more on trend and performing much better.
Samples demand for Osprey everyday travel backs was strong as well as demand for dry bar and Karl Smith liquids.
As always health care essentials, such as the monitors and humidifiers trend with health care needs and our health brands have the outstanding products range of price point and the trusted names consumers rely on them to care for their families.
Looking at our business segment sales growth in the quarter was led by health and wellness, which increased 27, 6% we.
We achieved significant sales growth in water purifiers air Purifiers, and humidifiers due to the EPA related stopped shipment actions in the prior year.
We were benefited from an uptick in category growth during the summer and back to school periods, we have largely restored viewers shelf placement and brick and mortar and online.
Humidifier patient VIX grew share in both devices and consumables as we were able to put more product on shelves and meet incremental demand as consumers experienced the summer surge of omicron and its variance.
While we continue to see the U S thermometer category decline off the historic high base set in the peak of the pandemic, our VIX digital thermometers achieved strong revenue and share growth over the last 13 week period as mentioned.
With our broad and vicks thermometers, both serving different consumer segments, and both delivering healthy operating margins the diversification of our product line up between the two brands is a winning mix.
Turning to home and outdoor total sales increased 11, 8%, which included the acquisition of Osprey.
Through for Hydro flask grew modestly in the quarter with strength in collegiate during the back to school period and strength in grocery.
The brand lost market share overall in the United States online sales were strong we grew share in our largest online retailer.
Internationally I, just last increased sales in Asia, and Canada fueled by improved consumer demand.
Looking ahead, we are focused on improving our DTC presence as we launch our new DTC platform this fiscal year.
Osprey had a strong quarter contributing $47 4 million in sales and remains on track to achieve our outlook range of $180 million to $185 million for the full fiscal year.
As expected oxo continued to face sell through decline similar to what we saw in the first quarter.
The overall categories. It competes in are generally declining from COVID-19 level peaks as consumers shifted some of their spending away from home related goods and adjusted their budgets to address inflation.
Nonetheless total sell through for OXXO remains solidly ahead of pre pandemic levels.
While we rarely mention specific retailer situations given the developments at bed Bath and beyond during the quarter, we want to update you.
Over the past few years, we have decreased our concentration of business with bed Bath and beyond and are continuing to manage our credit exposure.
That said, we are highly encouraged by their public statement emphasizing to refocus on leading power brands like OXXO that had been so important to driving traffic and sales.
We're highly supportive of their strategic returned to what we believe contributed to the previous success of this iconic retailer.
Regarding OXXO, we are working closely with them at the highest levels.
Turning to beauty core segment sales declined by 11% in the second quarter, primarily driven by continued softening in the hair appliance category off the high base of fiscal 2022.
The overall hair appliance category has experienced a decline.
We have lost some share in U S mass merchandisers as consumers traded down in that channel, partially offset by growth in our largest online retail partner.
On the prestige liquid side of beauty dry bars continued to perform well growing over the period.
In the prior year as we improved our supply to meet demand.
Christmas performed in line with our expectations for the quarter and remains on track to deliver its full year forecast.
For beauty stepping back to look at phase III to date, our focus on consumer centric innovation accretive acquisition in the prestige segment and building a much more capable organization that leverages. Our global shared service platform has resulted in improved sales profitability and market share during the transformation.
While the current environment is highly challenging we are working on new distribution and new products that we expect to serve as building blocks for the future.
Looking at our international business total net sales increased 27, 4% over the second quarter of last year with particular strength in EMEA, Canada and Asia.
Growth primarily reflects the incremental sales from the acquisitions of Osprey and curl Smith.
Macro economic challenges outside of the United States are comparable to what we all see the unmet domestically exacerbated by the further impacts of the strong dollar and war related energy and security in Europe .
Easter to exacerbate and escalate inflation and recession fears, causing shifts in consumer shopping preferences and higher price elasticities.
We are responding by focusing our efforts on those opportunities that provide the biggest potential.
We expect consolidated international sales growth in the second half of the fiscal year, primarily driven by Osprey.
We'd like to turn now to our revised full fiscal year 2023 outlook.
The deterioration of macro trends, the trading down behavior impacting our portfolio and share losses in some of our categories lead us to lower our organic revenue expectation and EPS outlook for the balance of the year.
Revised outlook includes our expectations for pressure on consumer spending and further retailer inventory corrections.
With regard to the upcoming cough cold and flu season, our guidance assumes a return to historical pre pandemic incidence levels as adult spend more time traveling and didn't offices as students return to in person schooling and as Covid restrictions are largely dropped in most parts of the world.
Lastly, our outlook includes the impact of certain supply chain interruptions, particularly in select the monitor models, we're securing sufficient chip supply has been a challenge.
We are being thoughtful about how we balance our short term profitability goals with our objective to preserve market share putting ourselves in a better position to return to growth, especially once retailers replenishment patterns normalized to reflect the point of sale sell through.
Our brands have a long history of earning trust and winning with consumers. We remain focused on value reframing and on product innovation to ensure consumers continue to recognize the quality features and the benefits our brands per box.
Stepping back I remain highly energized and enthusiastic about our business and the choices, we are making to position our company for continued long term leadership in profitable growth we.
We see Pegasus as the major catalyst to returning to top quartile financial performance.
By streamlining our portfolio cost processes and organization. We believe we can create significant value and are focused on doing so well.
We also expect to produce continued attractive returns from our strategic focus on consumer centric product and commercial innovation, our disciplined investments in our leadership brands international expansion and new growth opportunities such as direct to consumer.
With that I would like to hand, the call over to our CFO , Matt Osborne.
Thank you Julien good morning, everyone I would like to begin with an overview of our second quarter results then follow with a review of our updated fiscal 'twenty three outlook before wrapping up with more information on project I guess.
Looking at our second quarter, despite the challenging economic environment, we were able to deliver results largely in line with our expectations.
Our consolidated net sales increased nine 7%, primarily driven by the contributions from the Osprey and Karl Smith acquisition.
As well as significant organic growth in the health and wellness segment.
By the adverse impact of the EPA matter in the prior year period.
Overall organic sales were a drag on consolidated sales by one five percentage point.
This primarily reflects organic declines in the beauty and home and outdoor segments due to lower consumer demand shifts in consumer spending patterns inventory adjustments by retailers and $5 $7 million in personal care sales in the base last year that we subsequently divested.
GAAP consolidated operating margin for the quarter was 9% of net sales.
On an adjusted basis operating margin declined three two percentage points to 13, 9% at the operating leverage on higher sales and lower annual incentive compensation expense.
Offset primarily by higher outbound freight costs increased marketing expenses.
Favorable segment mix higher salary and wage costs higher distribution expense and the unfavorable comparative impact of gains recognized on the sale of property and then North America personal care business in the prior year period.
The higher marketing expense, primarily reflects increases due to the acquisitions of Austrian Karl Smith, and an increase in spending in health and wellness.
When we significantly reduced spending in the second quarter of last year due to the EPA matter.
Adjusted operating margin was down in all segments for the quarter with the most significant decline in beauty, primarily reflecting unfavorable operating leverage increased salary and wage costs.
Higher distribution expense and increase in marketing expense and the unfavorable comparative impact of gains on sales of assets recognized in the prior year period.
And home and outdoor as expected the acquisition of Osprey was a drag on adjusted operating margin in the quarter. We continue to expect that Osprey operating margins will improve over time and will be above the company fleet average in fiscal 'twenty five and beyond.
Adjusted operating margin for health and wellness declined as favorable operating leverage and lower personnel expense was offset primarily by the unfavorable comparative impact of tariff exclusion refunds received in the prior year period increased outbound freight costs higher distribution.
Higher inventory obsolescence expense and higher marketing expense, we expect our initiatives under project I guess this will help improve both short and long term profitability of the health and wellness segment.
Net income was $30 $7 million or $1.28 per diluted share.
non-GAAP adjusted diluted EPS decreased 14, 3% to $2 27, primarily due to lower adjusted operating income in the beauty segment and higher interest expense.
Inventory was $643 million at the end of the quarter. We continue to expect total inventory to decline sequentially in the third and fourth quarters of this fiscal year to end fiscal 'twenty three flat compared to the end of fiscal 'twenty two.
Although cash flow this year will be somewhat dependent on our ability to lower our inventory. We continue to expect slightly negative free cash flow for the full fiscal year.
We ended the quarter with total debt of 1.1 dollars $7 billion, an increase of $64 million from the first quarter of fiscal 'twenty three primarily due to capital expenditures related to our new distribution center and cash used for inventory.
Net leverage ratio was 316 times at the end of the second quarter. We continue to expect our leverage ratio to decline sequentially in the third and fourth quarters of this fiscal year in fiscal 'twenty three with the leverage ratio in the range of $2 75 to 3.0 times.
Now turning to our revised outlook for the fiscal year.
The current external operating environment has become even more challenging as outlined in our earnings release, we have revised our full year outlook for fiscal 'twenty three downward for both sales and adjusted diluted EPS.
Our revised sales outlook was primarily driven by expected further category decline and share loss in the beauty appliance and insulated water bottle categories due to trends in consumers adjusting their spending patterns in response to inflation and retailers further adjusting their inventories to better align with lower.
Sell through forecast.
Our sales outlook was also unfavorably impacted by ongoing supply chain disruptions for certain thermometers within our health and wellness segment and the unfavorable impact of foreign exchange rates.
In regard to our exposure to changes in foreign exchange rates.
Ultimately, 12% of our net sales revenue was denominated in foreign currencies. During the six month period ended August 31 2022.
That period, our sales have been unfavorably impacted by foreign currency fluctuations versus the prior year by $7 $7 million or 0.8%.
We have updated our revised outlook for the remainder of the fiscal year with the assumption that September 2020 to foreign currency exchange rates will remain constant for the remainder of the fiscal year in.
In addition, we continue to use cash flow hedges to mitigate a portion of our exposure to changes in foreign currency.
Our adjusted diluted EPS outlook is primarily being impacted by our expectation of lower sales volume, partially offset by lower annual incentive compensation expense and other cost reduction measures.
For fiscal 'twenty three we now expect consolidated net sales revenue in the range of $2.0 billion to $2.05 billion.
Which implies a consolidated decline of 10% to seven 8% and a core decline of eight 6% to six 4%.
We are pleased that our previous sales expectations for both Osprey and Karl Smith continue to remain intact and our revised outlook.
By segment, we now have the following net sales expectation.
And outdoor growth of three 5% to five 5%, including net sales from osprey of $180 million to $185 million.
Health and wellness decline of 13 point that 13% to 11%.
And a beauty core business decline of 21% to 19%.
<unk> net sales from curl Smith of $30 million to $35 million for the 10 month period of ownership in fiscal 'twenty three.
We now expect consolidated GAAP diluted EPS of $4.26 to $4 93.
And consolidated non-GAAP adjusted diluted EPS in the range of $9 to $9 41.
Implied the consolidated decline of 27, 2% to 23, 9% and a core decline of 26, 1% to 22, 8%.
This includes an adjusted diluted EPS contribution from Osprey of approximately 35 to 40.
And our pro rata fiscal 'twenty three contribution from Karl Smith of approximately 15 to 20 cents.
The decline in EPS contribution for Osprey versus our previous outlook, primarily reflects the impact of higher interest expense.
Due to our updated assumption of 450 basis points of interest rate increases in calendar year 'twenty two.
Although we expect to slightly expand gross margin in fiscal 'twenty three we estimate our consolidated adjusted operating margin will decline approximately 100 basis point with.
With roughly the same year over year decline in each of our segment.
The consolidated decline is expected to be driven primarily by a decrease in operating leverage the net dilutive effect of inflationary price increases.
The dilutive impact of the Osprey acquisition in the home and outdoor segment.
Higher distribution expenses.
Increased salary and wage costs and an unfavorable product mix within the health and wellness segment.
Our outlook for the estimated after tax impact of an incremental inflationary costs declined slightly to approximately $55 million to $60 million or approximately $2 25 to $2 50 of adjusted diluted EPS.
Continue to believe we can mitigate the majority of these costs.
Getting our playbook, which includes utilizing our contracted shipping rates.
Actions to implement productivity and cost savings initiatives with our suppliers.
Well as the price increases that are already in place.
As an example, even as market variables such as container spot rates have declined versus peak levels earlier. This year, we continued to purchase our sea freight below current spot rate due to favorable prenegotiated contracts.
Our outlook for interest expense is.
Is unchanged at $45 million to $47 million.
While we now expect the fed to increase interest rates by 450 basis points in calendar year 'twenty. Two ahead of our prior expectation. This is offset by the favorable impact of capitalizing interest costs related to the construction of our new distribution center.
Due to the current highly dynamic market conditions and unique factors affecting the comparability of our prior to a prior year base, we are providing additional quarterly context for our current expectation of the net sales revenue and adjusted diluted EPS outlook.
With regard to the quarterly cadence of the consolidated net sales outlook for the fiscal year. We now expect a mid teen percent sales decline in the third quarter and a high teen percent sales decline in the fourth quarter.
As a reminder, the fourth quarter of last year included sales from certain retailers securing additional supply ahead of expected price increases.
Favorable sales impact of health related products from the initial omicron wave and.
In approximately two months of sales from the Osprey acquisition.
With regard to the quarterly cadence of the consolidated adjusted diluted EPS outlook for the year, we now expect a high 20% decline in the third quarter and a low 20% decline in the fourth quarter.
Both quarterly declines are primarily due to lower sales volume higher interest expense and a higher adjusted effective tax rate.
As Julian mentioned in his remarks during the quarter, we focused on developing project Pegasus, which is our global restructuring plan intended to expand operating margins through initiatives designed to improve efficiency and reduce costs.
I guess, that's aims to further optimize our brand portfolio streamline and simplify the organization.
<unk> cost of goods savings projects.
Hence the efficiency of our supply chain network.
Optimize our indirect spending and improve our cash flow and working capital as well as other activities.
We have the following expectations for Pegasus.
Annualized pretax operating profit improvements of approximately $75 million $85 million, which we expect to begin in fiscal 'twenty four and be substantially achieved by the end of fiscal 'twenty six.
Yesterday, the cadence of the recognition of the savings will be approximately 25% in fiscal 'twenty for approximately 50% in fiscal 'twenty, five and approximately 25% in fiscal 'twenty six.
Total profit improvements to be realized approximately 60% through reduced cost of goods sold and 40% through lower SG&A.
Total onetime pretax restructuring charges of approximately $85 million to $95 million over the duration of the plan.
Which will primarily be comprised of severance and other employee related costs.
Sessional fees contract.
Contract termination costs, and other exit and disposal costs.
All operating segments and shared services will be impacted by the plan.
We believe these initiatives will create operating efficiencies expand our margins and provide a platform to fund future growth investments.
In addition, as part of the project Pegasus, we have begun implementing plans to reduce inventory levels increase.
Increased inventory turns and improve cash flow and working capital.
Looking ahead, we are working hard to return to growth in fiscal 'twenty four.
Although it is difficult to predict the macroeconomic business environment and consumer purchasing behaviors, we will encounter.
I believe that the initiatives identified under project Pegasus will help us offset some of the anticipated cost headwinds, we expect the pace in fiscal 'twenty four as we annualize higher interest rates incur incremental depreciation for our new distribution center and plan for higher annual incentive compensation expense.
As we move into fiscal 'twenty five 'twenty six Pegasus savings will provide additional opportunities for us to invest in our business as we continue to work to create long term shareholder value.
In conclusion, I am proud of how our teams are navigating a rapidly changing environment by focusing on serving our customers and consumers while actively identifying and acting on.
Opportunities to reduce costs and increase efficiency.
We will continue to balance the short term top line and earnings pressure against investing in our most important transformation initiatives that feed our flywheel and drive long term shareholder value.
And with that I would like to turn it back to the operator for questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question can you.
You May press star two if you'd like to remove your question from the camp for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys in the interest of time, we ask that you keep to one question each and invite you to rejoin the queue for additional questions.
Our first question comes from the line of Bob Leduc with CJS Securities. Please proceed with your question.
Good morning, Thank you for taking my questions.
Yeah, Good morning, Bob Nice to talk to you.
You as well I wanted to start I know this may be a little difficult difficult to assess but can you give us a sense of since you know the April guide how much of the change has been underlying demand versus you know the inventory corrections that we've seen as well and you know and then I guess.
Your best assessment as to when retail order patterns, you know may normalize or how youll know when things normalized.
Yeah, It's a great question as we.
Work on this as well.
It's very tough to separate these two both are material and it's hard to tell just because it's a chicken and egg the inventory corrections come based on the consumption and if the consumption is less than the retailer expected, which has been the case in some of our categories.
Then they then lower their inventory their repurchase rates and adjust their inventories so the chicken and egg part I think the easiest way to think about it is in the end, it's all consumption driven because the retailers current debt order estimates are based on their sell through rates. So as we call the sell through.
<unk> down a bit lower there'll be a bit more trade inventory that has to get worked through from our standpoint, it backs up into our inventory and then we work through our so there's a backup in that regard.
In the case of the win.
It's hard to take to note just because theres a lot of pressure on the financial health of consumers. These days. So the normalization I think is more about normalization of buying pattern as opposed to normalization of buying volume and it is my belief, but this is this is not a well vetted facts are that the consumer has very basic.
Needs in the categories, where we provide outstanding products. So whether it's the basics of beauty beauty never goes out of style consumers always want to look good I've never met a woman it doesn't and the outcome is the needs.
Are there just fundamentally there so as consumers delay their purchases were even trade down it doesn't mean, they don't need it just means they don't need it now or don't want is high priced an item now. So soon enough I guess is the answer there in the case of health care. It really floats with incidents. So this is more about the need based on how the sickness.
Or perceived threat of sickness is and that makes people are buying health care again, we have the best products are well known from our market shares you just saw the trade down helped us actually on Vicks thermometers helped us quite a lot in fact last quarter on market share.
As an example in the case of the housewares versus the outdoors, the outdoors or on trend. So.
So we don't see a need to normalize there. It's it's just doing well and it's not like it's going to head down. It just didn't go up so much core down so much just normal and in the case of the housewares side.
At the same thing consumers have the fundamental need a lot of that will depend how the holiday season goes and retail a little bit for housewares, a little bit for hydro flask, which does have a gifting tendency and to some extent for the beauty appliances that also have a gifting tendency. So that's where the normalization will come from in terms of how quickly I think it just depends on that.
<unk> financial health and the sell through rate at retailers as they worked through their inventory.
Thank you. Our next question comes from the line of her past break with Oppenheimer. Please proceed with your question.
Good morning, Thanks for taking my question, so just going to the back half guide on the top line I was curious if you can just walk through the key puts and takes there you know how you think about consumption the inventory headwinds.
And then I have one follow up question I forgot.
Yes, its similar yeah, Hi, Rupert are similar to Bob's question, it's going to depend on those same the same factors, but we've done here and I think the listeners in the market in general should simply no. That's we've called down the our expectations for consumption in the back half and frankly.
We were surprised the degree to which consumers slowed down in some of these particular categories. Just take beauty. For example, you hear a mixed message from the big retailers they'll tell you beauty does well, but as you parse it out and ask which Florida beauty does well you'll find out that the liquids do well.
But the appliances generally do well only in the lower price points. So for us with a good better best portfolio, the better and best gets hurt.
The good needs to compete in those lower price points. So we're making those types of assumptions for the back half, meaning that the liquids will continue to do well, which they are already I called that out in my specific remarks, just now and in the case of the appliances, we're assuming that they'll stay on this down downward cycle for the rest of this fiscal year and on the tray.
Downside, we're taking action on bringing in products that are more suited to those price points on the one hand on the other hand, bringing some pretty cool new items as well.
And stimulating the demand just like we have in the past with consumer centric innovation on brands that we know people want.
In the case of the.
Uh Huh retailer side, it's very similar to the answer from from Bob on the financial health of the consumer is very hard to say it really depends on what the fed does with the impact on consumers of interest rates and all the other macro stuff that people now in our case from a market share standpoint, you've heard us speak a bit about that in my prepared remarks today, there's a lot of work.
Going on to keep going on the subject to value Reframing and to make sure our products are front and center with consumers with the benefits and price points that we know they want today.
Yeah, Noelle, but before we go to the next question of what do you have any builds on the back half a consumption of expectations.
Okay.
Okay, well then we're good operator.
Thank you. Our next question comes from the line of Olivia Tong with Raymond James. Please proceed with your question.
Thanks, Good morning, one I think a little bit bigger picture about the outlook revisions in your view on consumer sentiment and where retailers stand. So my question first is just how if at all this is made you think about your portfolio, maybe taking a harder look at some of the categories.
On the price tiers that you're and whether there is white space that.
But you should be in or areas, where perhaps you should think about strategic alternatives for your business.
Yeah. It's a great question Olivia we do this all the time and you've seen us from time to time make adjustments in our portfolio, either bringing things in or even pulling things out and we're not afraid to do either one just in phase two alone. We've made a significant disposition when we took out the mass market personal care liquids.
But we added in the obvious three here dry bar Karl Smith Osprey. So we're not afraid to move on this topic. We are looking at our portfolio now through the same lens of what fits what we're not doing though is trading down our portfolio in the short term.
Can't say that from a consumer health standpoint, this too shall pass for all I know theres, a new lower normal for consumers, but I do know that pendulum swing and our products are not only timeless from a branding and trust standpoint, but we work extremely hard to keep them front and center for consumer.
We do want to increase the range of products that we have from the good better best portfolio because consumers are speaking of.
On that topic on the subject.
What it means for the portfolio, we're taking a look we're looking inside health and wellness. We made that specifically you called out in our prepared remarks, that's part of the <unk> project and then other parts of our portfolio, while we're not looking as hard on what might not be right for our portfolio. We are looking at what might be right to add.
Or to supplement in areas that we already play in terms of the Big picture I just want to use the moment to get the thought out.
Is it it's not just that the brands are timeless. It's at the work is specific on specific on new products specific on new marketing messages and then we ourselves are specific on shifting resources within the products to favor the ones that have the best prospects. So from a growth standpoint, there's there's meaningful building blocks I mean, just look.
Beauty.
Beauty alone has the opportunity to bring some lower priced in innovations and now. It also has some significant new products that are headed to the marketplace.
You know in the past, we've innovated and benefited from those in beauty specifically.
If you look at girls Smith, and Osprey, there both organic so this idea of hey, let's look at the portfolio. We did and we went further in prestige liquids and outdoor and what we believe is that they'll consider continued to grow at the high single digit rate that alone just based on the projections that we've made for them is another 20 million Bucks for next year.
We also believe but I can't promise this that the retailers won't need to make the same inventory adjustments for next year, because they already made them. This year and that alone is another building block. So if you take good brands new products good messages growth in the stuff, that's growing and then new marketing messages and new firepower in this stuff that's not oh.
We like our prospects.
Thank you. Our next question comes from the line of Anthony <unk> with Sidoti <unk> Company. Please proceed with your question.
Yes, good morning, and thank you for taking the questions.
Yeah.
So it's very nice to hear from you.
Likewise, yeah. Good morning, So I guess as you know in terms of the restructuring plan.
Can you just walk us through what's the initial kind of low hanging fruit so to speak that you think you'll be.
Some of the easiest to achieve it and kind of which areas will take more time to implement.
You're talking about growth, we're talking about Pegasus.
I guess this.
Vegas is just yeah just.
I'm glad you're.
I'm glad you're asking about this and by the way just so the group knows Noelle I asked her earlier she actually has a he's on the call. She is a technical problem.
We will speak in her stead on some of these topics, but I assure you she's she's on the call in and are highly focused on this and the later follow up calls so she'll be front and center participant.
On the subject of Pegasus, we're very excited about this well it hasn't come up in the questions is prominent at Helen of Troy, We're moving with speed, we're moving with certainty and we're moving in the areas that we've chosen to answer your question. The parts that are getting the most focus are the opportunities in cost of goods the opportunities in distribution.
Efficiency improvements, bringing down inventory and structural streamlining. So if you just go through those quickly on the subject of cost of goods, we see some significant upside on top of all the good stuff that's been done during the transformation for many years and there's a whole another layer that we now have identified.
And are moving quickly to go and I think some of those building.
Building blocks will come fairly quickly because of it in the case of the distribution centers, it's highly tied to inventory. So as we bring our inventory down the good stuff, meaning the benefits of the new distribution center, the DTC implementation speed.
Speed and some other things I will just go faster and help us.
From an efficiency standpoint, it may also allow us to free up some capital in the form of a real estate that we may not need and it gives us a flow through in those warehouses, it's not only more efficient but goes through systems that themselves have been upgraded and gives a double whammy in the good guy.
From a sourcing standpoint, as we diversify out of just China into more Mexico, and South East Asia. The acceleration there the currency stuff use of our buying power consolidation of suppliers. Just as examples. These are I don't know if the low hanging fruit, but big projects that are being worked out right now.
Pegasus itself is a multi year initiative that has a three year arc, but these things will come sooner. We're looking at some aspects of the SKU rationalization that will help from an inventory standpoint et cetera.
Look at the process and streamlining stuff as the organization streamlines and we've got some interesting ideas that we're working aggressively now and that will give us the opportunity to interface the business units to the shared services.
In ways that just make us go faster give the business units, even more focus on the innovation and the brand building, which is their heart and soul and gives more capability to the shared services. It's just a more efficient matrix. So that's the stuff that will come fastest and then we just think it'll build from there throw good brands.
Our cost structure, our flywheel, that's proven itself to have an ROI and grow our operating margin and just do all of it faster that's the goal for Pegasus.
Matt do you have anything to add on that day.
Anthony I think you know when you asked you were saying you know what comes a little bit sooner. What comes later I would say you know as Julian talked about some of the things that are part of project I guess this.
You know Cogs savings will come later, because those are things you got to identify.
She ate and then implement with your vendors and then sell through and by your inventory. So that's just a longer tail on realizing some of those cost savings, whereas more of the SG&A savings in the organization and maybe you know purchasing efficiencies can be realized sooner. So in terms of you know Julien said, what what are we working on theirs.
A lot, but in terms of what might be flowing through the P&L sooner rather than later.
You know that that's how you should think about it.
Yeah.
Thank you. Our next question comes from the line of Linda Bolton Weiser with D. A Davidson. Please proceed with your question.
Yes, Hello, how are you.
Hi, Linda always great to hear from you.
Hope you're well, yeah, Oh, yes, yes, I hope you are as well so yeah I just had a question on specifically on hydro flask.
In your comments you said in your commentary that the sell through was up modestly in the quarter, but that didn't really say anything about.
Maybe sales were down or something so I'm just curious like what is going on exactly.
Is it the inventory reduction in the channels that we're seeing for all the other categories and if sell through is kind of still pretty healthy like like why why would there be the inventory reduction and like what channel can you just give a little more flavor on what's going on with hydro flask.
Yeah.
Understood, Yes, it's a good question and I'm glad we get the clarification out there because I know folks are extremely interested in hydro flask and there's the mixed concept of sell through and sell in and therefore, our sales growth versus sell through and also importantly market share.
So the demand for hydro flask remains quite good on.
The market share is an up and down story for example in talking with the consumption here for example online in our biggest online retail customers picked up quite a bit of share in the last quarter alone.
For the fiscal year to date, the total business is actually down slightly in share, but not much it bounces around within two or three points over the last two years or so and so I would call. It more of the same some up some down in the case of the sell in the.
The sell in is slower and that's hurting our sales you can say well wait a minute if it's selling out why is it selling in slower it's because of that retailer inventory and then retailers are making two adjustments one how quickly they replenish and the other is how many weeks on hand, they hold so in terms of replenishment on a normal environment the REIT.
Taylor will simply replenish to expected demand and actual consumption in this environment. They are replenishing to two bets. One bet is how much more demand will be in the future and the other is how many weeks on and they would like to have by the end of whatever period. They are buying into so take now that's a specific retailer.
Each one has a slightly different story based on their strategy against those variables and then separately their expectations for the holiday season, which determined how much inventory they'd like to have on hand during that time in categories. Like this and if you look at the fundamentals on hydro flask. They look phenomenal hydro flask has its spring.
Election, coming that will be more of a Q4 and early Q1 story. There are some new products there as well that we're excited about and we're also excited about the DTC prospects in hydro flask I think there's people on this call who say Oh my goodness I've been hearing that forever, what I'd like to say about that is it's launched.
This fiscal year and that will give us a long long awaited bump on that topic can help us to catch up with competition, who we believe is ahead of us in that area and on the retailers themselves, they're just not as aggressive on carrying the inventory, which makes the difference in our sales and we've put that now into our forecast even further than we did before that's.
Why youre getting the mixed message.
Thank you. Our next question comes from the line of thought of Lubbock with CJS Securities. Please proceed with your question.
Great. Thanks, Thanks for the follow up here bad alluded to the inventory and some sequential improvements in the back half of this year, but maybe just just to follow up a little more clarity how much excess inventory do you estimate you're carrying and what's the kind of.
Timing for normalization is that you know partially in the second half and then carry into fiscal 'twenty four or so.
So how much excess inventory and when do you kind of get back to a normalized level and get all that cash out of inventory and onto the balance sheet.
Sure, Yes, it's a great question, we look at it more about elevated inventory because I know you and others on the call remember it was highly strategic to have more inventory during a period of much more supply chain uncertainty and elevated demand and that helped enormously in fiscal 'twenty, one and fiscal 'twenty two coming into this fiscal year the slowdown that we're talking about.
As the highly pronounced and not as big as what we expected. So it's more of an elevated and carryover of inventory than an excess in the case of how quickly it sells down it really depends on all this sell through commentary that we have and then Matt I don't know how far you'd like to go to try to dimensionalize that.
For Bob on the subject of conversion to cash before I tip. It to you, though I do want to say that.
The efficiency of our distribution centers and the speed with which the Pegasus projects on that subject can realize their benefits is highly benefited by the sell down in inventory.
Maybe you have got on this yeah and Bob you picked up on it you know I think where we are expecting sequential declines in Q3 and Q4, when we said getting to a place by the end of this fiscal that's flat work, where we were at the end of last fiscal but.
As Julian pointed out it is based on sell sell through normalizing and seeing how we come out of the holiday period. As we look ahead I still think that there is the opportunity to realize more efficiency out of our inventory and further you can.
Take that inventory down I think that what happened throughout fiscal 'twenty four for us.
We look ahead, so I think there'll be a big step for us getting from where we are now to the end of this year and then another big step as we look into fiscal 'twenty four.
Thank you. Our next question comes from the line of Steve Marotta with C. L. King <unk> Associates. Please proceed with your question.
Good morning, everyone is prepared remarks, hi, Julie.
Good morning in the prepared remarks, there was commentary around the potential of sales growth or the at least the plan for in fiscal 'twenty, four and I know without giving specific guidance can you talk a little bit about what might have to happen for that to occur or for that to be planned for.
Yeah. This is a great question.
As you called out it's awfully hard 18 months out meaning the midpoint of this fiscal year.
Through the end point of next fiscal year to predict the sales growth, we have our normal budget cycle and all of that so this is more of a spring thing than it is spring 'twenty three discussion that have fallen but to try to dimensionalize for you. Let me give you a couple here.
Some near term and some longer term.
Just start with the holiday.
Holiday season, their programs and the key retail partners in hair appliances also for hydro flask and to some degree for OXXO. In addition, hydro flask I just talked through some of the building blocks with them.
Linda and as I mentioned before that spring seasonal re reset of new line products is really more of a Q1 thing so that'll be more fiscal 'twenty. Four then it is fiscal 'twenty three the new direct to consumer program, especially focused on hydro flask, but frankly, not just hydro flask, it will expand into beauty as well.
And at the OXXO.
We are building a pretty awesome platform and that platform gets to scale as we bring those new tools online, it's pretty awesome and the point about it is that's a fiscal 'twenty four good guy the beauty innovations theres, some pretty sexy stuff coming.
<unk> with a few items that are meaningful from a consumer standpoint.
I don't think that a person on this call who enjoys the loud sound of a hair dryer and while many hair dryers have different tones of sound few of them are meaningfully quieter than others and yet we're bringing a product that does not sacrifice on power, but does improve on that timeless vector of quietness theres. Another on the one step.
Franchise.
For beauty, especially on Revlon, now, where we've had enormous success, but now thinking the curly and drawing area as opposed to the volume Mizer driving area. So excited like this in a big way than.
When you look at the.
Health and wellness stuff.
Some of that is seasonal or it depends on the cough and cold and all of that and omicron has been up and down. So it was delta before that so it's hard to predict.
Big driver just let the seasonality play through but the point is when people get sick, we have exactly what they want and our market shares prove it and then lastly on the subject of the retail trade, there's an inherent building block, which as I mentioned before.
<unk> are unlikely to need to do an inventory correction of this size again, because if you bring it down then it's down only thing that would make that happen is if the consumer falls off the cliff from financial health standpoint, and I don't think anybody is expecting it to go so low that you would get something of the same size as what happened. This year. So there is an inherent building block of <unk>.
Having to anniversary that with another decline at the same sites. So these things are all good guys and you take the international aspect there are certain countries products categories that we're excited about and then the classic stream of innovation that always comes from our products. All of these make a big difference for us. So that's enough in our view to be optimistic.
About returning to growth on the top line and yet we will have to go through the budget process. The sizing all of that and how much we can afford to put our shoulder behind it which depends quite a lot on how quickly we can realize the savings from Pegasus.
Thank you. Our next question comes from the line of Linda Bolton Weiser with D. A Davidson. Please proceed with your question.
Hi.
Hi, we'd have some questions from investors about the general situation with the price increases I guess investors that's affecting that some of the price increases that have been taken will have to be rolled back are.
Are you seeing that happen and can you just kind of comment on the whole pricing situation.
Yeah consumers are less financially healthy than before in general it is pockets right some groups of consumers different than others, but the inflation is nobody's friend, so to the extent that our price increases add to it then in that way the prices are not the friends of purchases.
That said costs are up so our salaries are real incomes they benefit from the wage increases, but also get eaten away by the inflation. So the consumer is actually a bit worse off in general on average I think 8% inflation, but maybe not 8% salary increase for everyone and so from the standpoint.
Pricing pressure, it's there in terms of our prices in general are prices of stock and it's our intention to try to continue that and that said, we will adjust as needed to protect our market share and the marketplace is strong on that subject it moderates because of buy in.
<unk> and price to get to the new normal. So we'll do what we have to do and then in certain pockets where testing what would happen. If we did a bit less on price and in other areas. We're sticking fast.
Find out where that new normal is.
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Mr. Muilenburg for any final comments.
Yes. Thank you operator, and thank you everybody for being on the call today I Hope people walk away with the key messages around where we are on our outlook for fiscal 'twenty, three which is two.
Take a good hard look at the trends that we've seen one frankly and embrace the facts of where we are in terms of market share inventory and some of the other things that I mentioned that are unique to Helen of Troy in our in our comments earlier today and in these answers and then I hope people see the power of what we're trying to do with peg.
I guess this is revolutionary we've not done the structural restructuring of this size.
A decade.
What it's going to do for us as outlined in the call is generate significant savings that we'll use to refuel that flywheel and bring what I hope will be the best is yet to come and that is very much our intention and act with speed. So with that we look forward to talking to many of you in the coming hours actually in the next couple of days and then I am sure will.
I meet with many of you as we know out of our quiet period and answer all of your questions.
Hope you have a wonderful day. Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.