Q1 2024 Helen of Troy Limited Earnings Call
Greetings and welcome to the Helen of Troy Limited first quarter fiscal 2024 earnings call.
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A question and answer session will follow the formal presentation.
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Note that this conference is being recorded.
At this time I'll hand, the conference over to Jack Johnson Senior Vice President corporate business development. Mr. Johnson, you may now begin.
Thank you operator, good morning, everyone and welcome to Helen of Troy's first quarter fiscal 2024 earnings conference call.
Agenda for the call. This morning is as follows I'll begin with a brief discussion of forward looking statements. Mr. Julien Many Barry <unk>, the company's CEO and these new wells you bought the company CLO will comment on financial performance of the quarter and current trends.
Then Mr. Brian grass, the company's interim CFO , who will review the financials in more detail and review our financial outlook for fiscal 2024. Following this we will take questions you have for us today.
This conference call may contain certain forward looking statements that are based on management's current expectation with respect to future events or financial performance.
Generally the words anticipates believes expects and other words similar are words identifying forward looking statements.
Forward looking statements are subject to a number of risks and uncertainties that could cause anticipated results to differ materially from actual results.
This conference call May also include information that may be considered non-GAAP financial information.
non-GAAP measures are not an alternative to GAAP financial information and maybe 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 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 company's website at Www Dot Helen of Troy 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 Companys homepage and then the press releases tab.
I will now turn the conference call over to Mr. Maiden Berg.
Thank you Jack good morning, everyone and thank you for joining US today, we would like to talk about our first quarter results provide color across our business and update you on our continued strong progress on project Pegasus as well as some other company initiatives. We will also discuss our outlook for the full fiscal year.
Starting with the quarter I am pleased to report that our results, including our sales and adjusted earnings per share were better than we expect.
The lower consumer demand and shifting buying patterns.
We are also pleased to improve our margins make further progress on inventory reduction and deliver significantly improved cash flow.
Looking at revenue, we saw outperformance from key leadership brands, including OXXO, Osprey, and pure as well as from Karl Smith.
Several of our leadership brands are improving share in certain categories in the United States, including technical backpacks from Osprey.
Kitchen, utensils and storage containers from OXXO.
Pharmacy humidifiers for VIX nasal aspirator for Braun and seasonal heaters for Honeywell.
Our prestige hair care liquids, which features some of the highest margins in the company grew during the quarter compared to the first quarter of last year inter.
International also outperformed during the quarter driven by Braun.
Our strategic choice to double down and international continues to pay off.
For perspective, our consolidated first quarter revenue grew at a 6% compound annual growth rate compared to the pre COVID-19 base of fiscal 'twenty.
During the quarter. We also made good progress on margin significantly improving gross profit margin and expanding our adjusted operating margin.
We also delivered outstanding operating cash flow in the quarter, well ahead of expectations driven by better than expected sales and significant progress on reducing working capital.
I'm very pleased with how well our organization is executing on the very initial various initiatives, we have announced designed to significantly improve cash flow in fiscal 'twenty four.
In line with our stated objective we used our cash flow to further reduce our debt putting us in a better position to deploy additional capital sooner.
Turning to our outlook, we are maintaining our expectations for net sales and adjusted earnings per share for the full fiscal year as well as our key cash flow and balance sheet targets.
We expect to deliver including a return to adjusted earnings per share growth in the back half despite expected pressure on our categories and consumers for the remainder of the fiscal year.
That consumer pressure includes inflation interest rates that are expected to stay higher and increasing household debt all of which are headwinds to discretionary purchases.
On a positive note we are seeing that retailer inventory rebalancing is largely normalized following the significant adjustments affecting nearly all consumer discretionary categories over the past year.
Our retail partners are now increasingly matching their orders to consumer demand.
Where we have syndicated point of sale data and then retailers, where we have specific point of sale data. We are seeing demand normalized in some of our categories and settle at or above pre COVID-19 levels.
Before turning the call over to Noel and Brian I would like to comment on Pegasus.
You May recall Pegasus is designed to improve operating margins cash flow and operating and organizational efficiency.
I am very pleased with how well our associates around the world have embraced the Pegasus structural changes and its financial goals.
On the structural side the specific changes we announced in January are working.
The new North American regional market organization is expected to take our sales and shopper capabilities to new levels.
You know our business segments, our brand and category teams are now even more obsessed with delighting consumers.
Similarly in shared services, our global operations teams are implementing new standardized tools and fully owning our supply chain end to end.
On the savings side instead of work streams, we are executing under Pegasus are nicely on track.
In all cases, our people are flowing to the work they are demonstrating their adaptability demonstrating the power of our culture and executing with excellence.
We continue to believe these initiatives will improve profitability and provide significant fuel to make additional growth investments in our flywheel that are intended to drive sustainable long term growth and value creation.
I will now turn the call over to Noel who will speak more about further progress on several business initiatives, including some that fall under the Pegasus work streams. She will also speak to our business segment performance.
Thank you Julian and good morning, everyone.
Echoing julians comments I'm proud of our team's focus dedication and achievement today, it's in a wide range of initiatives I'd like to highlight several of those here including package.
Specific to take offence as expected we are seeing significant momentum and savings in line with the previously announced target <unk>.
This continues to help us offset some of the anticipated cost headwinds this fiscal year.
Further the new capabilities and our go to market structure analytics operations and finance are expected to help improve our performance and simplify how we work in fiscal 'twenty four and beyond.
As a reminder, about 25% of our Pegasus saving is scheduled for this fiscal year with the largest portion of targeted savings scheduled for realization in fiscal 'twenty five.
Major in fiscal 'twenty.
We intend to use the savings to fuel our value creation flywheel investing and brilliant marketing and even more consumer centric innovation to delight consumers and shoppers and further enhancing the capabilities of our regional market organizations and global shared services.
We also continue to look for ways to accelerate the savings so that we can reinvest in growth more quickly.
One of the key structural changes in Pakistan was the creation of a north American regional market organization or N E. R. M L.
Our fourth quarter call, we highlighted the benefits of this organization, including securing new distribution implementing joint business plans with our biggest retail partners and using shopper data to better identify and act on relevant insights.
We recently held our first ever N E. R. M. A sales meeting focused on educating collaborating sharing best practices and rallying behind our brand plans and multiyear innovation pipeline.
The meeting with all of energy Pride in collaboration and I'm pleased to report that the team has identified and is securing meaningful additional growth opportunities that we expect to contribute to sales longer term.
Another pegasus initiatives related to our design to value our D. T V initiatives.
Our D. T V approach combined with consumer insights to understand what they value most competitive insights into how other companies products to meet consumer needs and supplier insights into new technologies and the cost to manufacture.
We use this process to elevate and build better.
Our team is energized and has several new design to value explores for initiatives inside.
These include additional platforming across several different products to standardize componentry and raw materials as well as new design engineered to deliver better performance at a lower cost.
We are making significant progress on our previously announced nearshore sourcing initiatives to grow the existing and new supplier capabilities outside of China.
It will help us diversify geopolitical risk enhance our responsiveness and reduce inventory.
These moves also create value as they can provide succor transit times greater speed to market scale advantages and process standardization.
During the first quarter, we implemented a major piece of a multi year near shoring strategy successfully relocating some production of hydro flask bottles to the western Hemisphere OXXO.
Oxo top containers are also expected to begin near shoring by early fall of this year.
I'm also very proud to share that our new Galloway, Tennessee distribution Center completed in March was recently awarded the prestigious LEED Silver certification.
In addition to its environmentally friendly design. This new facility has significant levels of new capability in automation that will enhance multiple areas of our business for years to come.
We now have greater ability and capacity for inline customization and personalization for direct to consumer hydro flask corners.
This enables consumers to make their bottle, our tumblr fit their unique personality and need through engraving customer color combinations and custom accessories like strap lid and bid style.
Most recently in June we increased our personalization options by adding 86, new designs that consumers can choose from.
We are also scaling up our automatic carton packaging system.
These machines create custom shipping boxes from continuous feed corrugated cardboard.
Each shipping carton is perfectly sized to fit each order.
This real time format change isn't managed automatically and directly from a database the.
The equipment offers high levels of flexibility automation and speed of processing and can create one box every few seconds.
Our made to fifth ship are incorporates bumpers into the packaging protect items from damage during transit, while reducing the amount of packaging material used.
The packaging also offers easy on the ceiling and reselling for frictionless returns.
We launched this better and more efficient initiative on hydro flask bottles and are meaningfully reducing carbon emissions and cardboard is required.
Using less billing materials.
Reducing the customer transport volume Q by almost half our bottles.
This capability offers a better consumer experience improved operational efficiency and less waste.
I would like to now turn to our first quarter business results.
Holiday did net sales declined six 6% and core adjusted diluted earnings per share declined 19, 5% in the first quarter.
As Julian highlighted these results were better than we anticipated.
Let's start with home and outdoor.
[noise] Osprey performed very well in the quarter driven by a number of factors, including our improved inventory position compared to fiscal 'twenty three when COVID-19 related factory closures curtailed spot.
We also benefited from new product introduction and accelerated demand in the travel category both in the U S and abroad as well as strong online point of sale and replenishment.
Osprey also expanded its number one share position in U S Tech packs and the most recent three month period.
The gain was driven by improved supply and product innovation, such as improved spike in hydration packs and extended his technical packs to empower people of all shapes and sizes to embrace the outdoors.
We expect the osprey to continue to benefit from a better inventory position the strength in the travel market, our strong innovation and expanded distribution in both existing and new customers in fiscal 'twenty four.
The OXXO brand also outperformed the market in core categories, even as the overall home category trends continue to normalize from Covid highs and consumer spending shifts towards necessities travel and services.
Sales were also impacted in the quarter by the timing of some club programs, which fell into the first quarter last year, but will fall later this fiscal year.
For additional perspective, the kitchen gadgets and dry food storage categories and OXXO sales remained solidly ahead of pre pandemic levels.
Oxo saw strong point of sale and replenishment from key brick and mortar retailer and also benefited from new distribution, including selling for test of oxo Softworks at Walmart.
Oxo is market share growth in both kitchen, gadgets and drive food storage and the most recent three month period was also driven by new product innovation, one, particularly successful innovation that launched in may as the OXXO grilling.
System design based on the consumer insight of reducing trips from the inside kitchen to the grille. The four nine star rated Sac features nothing containers to prep marinate transport and serve grilled meat and vegetables.
It has garnered strong attention on tech talk and earned a ringing endorsement by the kitchen and highly respected third party, which called it a game changing OXXO find that it's a must have for grilling season.
Turning to hydro flask and.
In brick and mortar the brands face continued pressure in the quarter from overall softness in the insulated bottle category.
Consumer preferences continue to shift away from bottles in the U S where hydro flask is by far the leader to Tumblr, where the brand has a smaller presence.
So going to the end of the quarter Hydro flask executed a soft launch of the new travel Tumblr on June 21st exclusively on hydro flask Dot com with great colors, the unique ability to customize with engraving and a flexible straw. We're excited by the strong consumer response and are optimistic about growing this.
New additions to the hydro flask family.
In March Hydro flask introduced a first of its kind stainless steel bottle trade in and recycling program, specifically designed to ensure hydro flask product our recycle in an easy and responsible way.
Process is simple and straightforward consumers register their hydro flask bottle with Stephen print out a shipping label and drop it off at the nearest shipping location no packaging require.
Hydro flask recycles, the product and the consumer receives a five dollar promotional codes to use on a future purchase.
This illustrates how the brand is participating in the circular economy, and it's providing a way for consumers to feel better about parting ways with their well loved hydro flask.
Turning now to beauty and wellness.
And our beauty portfolio, our hair appliances maintained a strong position even as the broader category continued to moderate compared to the prior year period.
The Revlon Volumize are maintained above a four five star rating with over 330000 reviews on Amazon alone and multiple industry awards, including four additional awards in 2023, such as the Allure Readers' Choice Award.
Appliance category softness was offset by good performance in our prestige liquid which included a full quarters contribution from cross Smith compared to six weeks contribution in the prior year due to the acquisition timing.
Both dry bar and Kroll Smith performed well in the quarter and our new hot tools liquids available exclusively at Alta are resonating with consumers and on track to meet our expectations.
We have meaningful new beauty product introductions planned for this fiscal year, including new product line launches and line extensions supported by commercial innovation as well as engaging promotions around major holidays.
Dry bar new launches include the Smiths shot paddle brush blow dryer, a new addition to our top selling drive RMP talks dry shampoo range and a line of liquid products designed to offer more thickness and volume Karl Smith also has a great lineup of new products, including effortless waves.
Wallace finish hairspray, and a new anti friends recipe line.
Turning now to a wellness, our previously announced SKU rationalization program disproportionately touched our wellness portfolio.
That impact was felt in the quarter on sales, but meaningfully improved the margin profile of the portfolio complemented by strong performance from high margin Vicks Inhalant consumable.
Looking at specific loan categories, we saw strong <unk> sales outside the U S. Our supply improves this was offset by softer sales seasonal fans air filtration and he modification product is consumer spending shifted to other categories, such as services and travel.
Despite overall category declines Helen of Troy as U S market shares remained strong and thermometers inhalants and humidifiers with a number one position among branded product in all three of those categories.
And water filtration that we saw some pick up in overall category growth in the first quarter and pure made a positive growth contributions for our beauty and wellness sales.
Subsequent to the end of the first quarter, we saw incremental air purification device and filter sales due to the wildfires smoke blanketed much of the U S northeast quadrant and parts of the Midwest in late May and throughout June .
We are proud to be able to help consumers and service retailers when they need us most.
These wildfires continue we will continue to serve the demand.
Last on the international front, we achieved sales growth driven primarily by the contributions of Braun Osprey Hot tools and cross Smith replenishment orders in select brick and mortar partners continue to normalize in line with point of sale.
Braun outperformed our expectation because we were able to partially overcome continued supply constraints to help meet increased thermometer demand for the brand in EMEA and Asia.
With that I would like to hand, the call over to Brian .
Thank you Manuel and good morning, everyone looking forward to seeing some of you at the C. J S Conference Tomorrow.
Julian and Noel mentioned first quarter results exceeded our sales and earnings expectations with year over year margin expansion, despite unfavorable operating leverage.
This outperformance coupled with meaningful working capital improvement drove strong cash flow and leverage reduction also ahead of our expectations at this point in the year.
Consolidated net sales decreased six 6% favorable to the 9% to 7% decline we provided in our outlook in April .
This reflects a shift of approximately $5 million of sales. We previously expected in the second quarter of fiscal 'twenty four into the first quarter.
As a reminder, our outlook includes expected declines from our SKU rationalization efforts and the impacts of the bed Bath <unk> beyond bankruptcy.
We saw favorable performance from key brands in both business segments International and the online channel.
In home and outdoor OXXO exceeded our expectations. Despite a decline in club channel programs year over year, and Osprey Osprey growth was driven by strong consumer demand for travel related products.
Beauty and wellness demand for Braun thermometry drove year over year growth, especially in international markets and high water filtration demand drove growth in pure.
Our prestige beauty brands drive our accrual Smith continued to drive underlying growth and improve our mix with distribution expansion and innovative products that resonate with consumers gross profit margin improved 380 basis points to 45, 4% compared to 41, 6% in the same period last year.
In line with our expectations for the quarter.
Year over year improvement was due to a more favorable product mix in beauty and wellness driven by Pegasus SKU rationalization.
More favorable customer mix in home and outdoor.
Lower inbound freight costs and the favorable comparative impact of EPA compliance costs of 180 basis points incurred in the same period last year.
GAAP operating margin for the quarter was eight 6% compared to six 7% in the same period last year.
We were pleased to expand adjusted operating margin by 30 basis points to 13, 9% despite unfavorable operating leverage.
The primary drivers of this improvement were a more favorable product mix within beauty and wellness, reflecting the benefits of SKU rationalization and.
A more favorable customer mix within home and outdoor.
And lower inbound freight costs.
These factors were partially offset by higher inventory reserve expense increased annual incentive compensation expense and an increase in outbound freight costs.
On a segment basis home and outdoor adjusted operating margin decreased 30 basis points to 15, 8%.
Driven by higher distribution expense increased marketing expense higher inventory reserve expense and increase in outbound freight costs and unfavorable operating leverage partially offset by a favorable customer mix and lower inbound freight costs.
Adjusted operating margin for beauty and wellness segment increased 80 basis points, reflecting a more favorable favorable product mix driven by our SKU rationalization efforts lower inbound freight costs lower distribution expense reduced marketing expense and a decrease in legal fees.
Net income was $22 6 million or <unk> 94 cents per diluted share.
non-GAAP adjusted diluted EPS decreased 19, 5% to $1 94 per diluted share primarily due to higher interest expense and lower adjusted operating income and home and outdoor.
Cash flow in the quarter was strong we generated $121 1 million of operating cash flow with a sequential decline in inventory of $21 6 million among other working capital improvements.
Inventory at the end of the first quarter was $433 9 million on track with our objective to reduce inventory to $400 million or below by the end of fiscal 'twenty four.
We generated $109 2 million of free cash flow ahead of our expectations for the quarter.
We ended the quarter with total debt of $837 2 million a sequential decline of approximately $97 3 million.
Our net leverage ratio improved to five six times compared to $2 eight one times at the end of the fourth quarter.
At the beginning of the first quarter, we swapped an additional $200 million of our outstanding variable rate debt to fix rates, bringing the fixed rate totaled $625 million or 75% of our total debt outstanding.
At the end of the first quarter, our debt covenants allowed for additional borrowings of up to $343 million and the amount available for borrowings under our credit agreement was $638 million.
We believe we remain on track to reduce our net leverage ratio to between two times and 185 times by the end of fiscal 'twenty, four not including any benefit from facility footprint optimization efforts that are underway.
Turning to our outlook for fiscal 'twenty four we are maintaining our full year expectations. While we are pleased to have outperformed our expectations in the first quarter at this point in the year, we are maintaining our flexibility to use the over performance to fund incremental growth investments in our most attractive brand opportunities or is <unk>.
Offset to potential further consumer spending softness.
We will continue to assess our algorithm for balancing investment spending and earnings growth as the year progresses.
Our view on a significant or prolonged recession has not changed and that it cannot be reasonably estimated and therefore it is not included in our outlook.
We are encouraged by the continued overall improvement in trade inventory on a sequential basis and believe that when consumer demand does strengthen we are well positioned with a diversified product portfolio and sufficient inventory to serve that demand.
We continue to expect consolidated sales between $1 96, 5 billion and $2 <unk> 5 billion in fiscal 'twenty four implying a decline of $5 two to two 8%, which continues to reflect the estimated unfavorable year over year revenue impacts of our SKU rationalization efforts and the bankruptcy at bed Bath and beauty.
<unk> of approximately three 4% combined.
In terms of our net sales outlook by segment, we expect the home and outdoor decline of one 7% to growth of 1% and.
And the beauty and wellness decline of 8% to five 8%.
We believe we remain on track to deliver a gross margin expansion target of approximately 460 basis points at the high end of our guidance range as we drive improvement in product and customer margin mixes disproportionately fee at our highest margin businesses from an investment perspective, and realize the benefit of lower commodity.
And the amount of inbound freight costs.
We expect GAAP diluted EPS of $3.81 to $4 67.
Which includes the estimated balance sheet impact of the bed Bath <unk> beyond bankruptcy of 17 cents.
An estimated restructuring charges of $2 75 to $2.43.
We continue to expect non-GAAP adjusted diluted EPS in the range of $8 50 to $9, which implies a decline of 10, 1% to four 8%.
Our adjusted diluted EPS outlook continues to include an increase in interest and depreciation expense totaling approximately 91 net of tax or a nine 6% gross headwind.
Our outlook continues to reflect the operational earnings growth despite unfavorable operating leverage.
At the high end of our outlook range. Adjusted EBITDA is expected to grow approximately six 3% and margin is expected to expand by approximately 150 basis points. Despite incremental annual incentive compensation expense of approximately $27 million year over year, which represents an eight 2% gross headwind.
And 135 basis point margin headwind.
Our outlook for operational earnings growth is driven by a better overall margin mix lower commodity and inbound freight costs and cost savings from Pegasus, which remains on track, we expect tiger supposed to be a force multiplier with benefits in fiscal 'twenty. Four to include initial cost savings organizational and go to market effectiveness more.
<unk> and effective marketing spend and the optionality to consider opportunistic incremental growth investments during the year.
We continue to expect Pegasus to generate savings of approximately $20 million in fiscal 'twenty four with additional savings expected from lower inbound freight and commodity costs.
As previously discussed the Pegasus the savings were partially offset several structural headwinds in fiscal 'twenty, four including incremental depreciation expense of approximately $12 million before tax related to our new state of the art distribution facility.
Annual incentive compensation expense of approximately $27 million before tax as we reinstate expected expense target performance and higher interest expense of approximately $15 million before tax as we annualize the increase in interest rates through fiscal 'twenty three.
This includes our expectation of cumulative incremental rate increases of 100 basis points in fiscal 'twenty four.
Moving on to our tax outlook, we now expect a GAAP effective tax rate range of 21% to 19% for the full fiscal year 'twenty four and a non-GAAP adjusted effective tax rate range of 13, 5% to 12, 5%.
In terms of quarterly cadence, we continue to expect the majority of our net sales growth to be concentrated in the third quarter of fiscal 'twenty, four and expect a decline of approximately 8% to 6% in the second quarter.
This reflects the shift of approximately $5 million in sales from the second quarter into the first quarter that I mentioned earlier.
We expect adjusted diluted EPS growth to be in to be concentrated in the third and fourth quarters of fiscal 'twenty four as we benefit from lower inbound freight and commodity costs.
We also expect to realize the benefits of that deleveraging more fully in the second half of the year.
Accordingly, we expect a decline in adjusted diluted EPS of <unk>, 20% to 30% in the first half of fiscal 'twenty four with near offsetting growth in the second half of the year.
We continue to expect capital asset expenditures of between 45 and $50 million for fiscal 'twenty, four which includes approximately $25 million for the completion of our new distribution facility in the full installation of its state of the art automation equipment.
We continue to expect that the final cost of the facility and its equipment will be within our original expectations.
With lower Capex any capex needs in fiscal 'twenty four we continue to expect free cash flow to be in the range of $250 million to $270 million and net leverage ratio improvement two between two times to 185 times by the end of fiscal 'twenty four.
We continue to assess opportunities to further optimize our facility footprint, which we believe could unlocked an additional $100 million to $125 million of cash flow that is not currently included in our outlook.
In summary, we are pleased to reiterate an outlook that we believe is accretive to our current valuation with strong free cash flow operational earnings growth and margin expansion, despite a challenging consumer environment.
We remain very excited about the opportunities that Pegasus provides to drive further performance improvement in fiscal 'twenty four and beyond.
Finally, we believe our strong cash flow and asset optimization efforts will allow us to continue to meaningfully reduce our debt leverage and consider capital deployment optionality going forward.
And with that I would like to turn it back to the operator for questions.
Thank you.
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One moment, please while we poll for questions. Thank you.
Our first question today is from the line of <unk> <unk> with Oppenheimer. Please proceed with your questions.
Good morning, and thanks for taking my question also congrats on a nice quarter. So I just wanted to go back to the hydro flask brand. So there seems like there's positives and negatives right now for the Brown. So your Tombo launch seems like its off to a good start at the same time, we are seeing discounting in the channel for further product just wanted to get a sense of just overall health of Brandon your updated expectations for for Hydro flask Mascara.
Mr.
Great. Good morning, Lupashin Hydra, everyone. Noel. Please go ahead, yeah hydro basket good to hear your voice.
Yes, so on hydro flask, I would say as I outlined in the script, we continue to see consumers shifting from bottles were hydro flask is by far the leader to the Tumblr in the quarter, but as you outlined we.
We're really pleased.
And initial soft launch of our travel tumbler in June so just past the end of the quarter and we are really encouraged by the early sales results.
From from that consumers are.
Porting, they're really pleased with the functionality of what we've put out there and we see it as a really nice ROE Madison piece for us and in the balance of the fiscal year.
We also.
You mentioned a couple of other initiatives on hydro flask, we greatly enhanced our personalization and customization offerings.
We got out there with the bottle, which return program. So a lot of positive news happening on hydro flask right now.
We see that as a strong building block to strengthen the performance in the back half of the year across the brand in total and especially entering into the Tumblr piece of the market that's been growing.
Just.
Handle the promotional question Ritesh I would say the promotional activity is kind of normal for us we did a map pricing holiday during the quarter and Thats pretty much standard and then we do promotions really too.
Out of colors that we're discontinuing and get into new colors, and new items and so I would call both of those activities the map program and the.
Kind of rotating into new product both normal promotional activity.
Alright, Brian related to hydro flask I believe your expectation was for growth for the full year is that still the expectation.
Slight growth to flattish I would say and Thats still our expectation where we are its early days on the traveler were excited about the traveller, but we have not factored in.
Meaningful upside into our forecast from it at this point.
We are encouraged by it but we're going to let it evolves and I just want to point out we did a soft launch online.
Leaning in more.
Great. Thank you I'll pass it along.
Our next question is from the line of Bob <unk> with CJS Securities. Please proceed with your questions.
Yes, hi, good morning, it's Pete Lucas for Bob.
You gave us a lot of detail on project Pegasus, obviously seeing significant benefits to the margin profile of what has surprised you. The most in terms of the rollout either positively or negatively and what is the biggest things you've learned so far.
Yes, Hi, Pete.
Nice to talk to you and always a pleasure to have C. J S represented as well.
In terms of project Pegasus I think the most positive as we've mentioned in our prepared remarks is how well the organization has embraced it.
The full scope. This is not the standard belt tightening exercises we've talked from the very beginning back in October for Pegasus. This is a comprehensive.
Our restructuring and a reinvention is very similar to what we've done multiple times always taking the company to the next level never waste a good crisis as they say so for me. The single most important thing is how well the organization has embraced it dug deep and has not only made the structural changes but also.
Aggressively pursuing the specific work of each work stream and their financial targets.
I suspect you will be able to elaborate a bit on.
Pegasus moments.
Yeah, I would echo Glenn's comments I think.
On a program like this it is always the question Mark is how well the organization react and I'm delighted.
Mentioned in my remarks, the first half of our North American RMS sales meeting that we just have to see that the team has come together. The business unit is very focused on sharpening our brand our brand plans sharpening their innovation pipelines, the north American <unk> in the audience.
Excited about those plans coming forward with new growth opportunities and growth ideas as I look across the full portfolio.
It was very very heartening, and I think a testament to the choices that we made and the organizational structure as I look at some of the other work streams again, SKU rationalization with a big focus area and the team really took that.
To a great bottoms up analytical rigor that has it really helps us from a gross margin standpoint on parts of our portfolio. So thats been a real positive as they've embraced that work.
Got a lot more work streams that are still underway that'll that'll com as a reminder, the bulk of the savings comes in fiscal 'twenty five to fuel our our initiatives and in that timeframe and we're very pleased with the momentum that we see across all of the work streams.
Very helpful. Thanks, I'll jump back in the queue.
Our next question is coming from the line of Olivia Tong with Raymond James. Please proceed with your question.
Hi, This is Devin Weinstein on for Olivia I appreciate you, taking our questions and congrats on the better than expected quarter.
I wanted to ask a little bit more about your outlook for the year.
Specifically for <unk> understood on the components impacting the $5 million in back of your sales outlook, but you did maintain the EPS guide for the first half decline 20, or 30% and I just wanted to understand some of the dynamics going into your two Q outlook, saying.
Sequentially, there should be some cost easing it sounds like sell in and sell through are in a much better place.
How does maybe the sales comp what are some of the dynamics impacting that <unk> outlook that would get us first half to be down 20%, 30%.
Yes. So there are a couple of moving parts in the question you are referring to sales and hopefully that that part of our sales is clear really the only change in our outlook came from this kind of $5 million shift that went into Q1. We originally expected in Q2, so hopefully that's clear and I would say there is.
No other meaningful moving parts with respect to sales with respect to adjusted EPS. The main driver Southern Theres two components right. We're sticking with our original guidance, which is 20% to 30% down for the full year.
After posting Q1, it was a little bit better than expectations.
We are expecting some spend shift some growth investment spending that.
It didn't make sense to make in the first quarter that we now planned for the second quarter and Thats really why.
For the full first half of the year, we'll stay within the 20% to 30%, even though we were slightly better than the first quarter, we do expect to come down a little bit in Q2, as we spend a little bit more into the strength of.
Good initiatives that we have go including the Tumblr.
Rollout and.
New introduction.
That makes sense. Thank you and if I could just tack on the second part of that question.
You guys did call out some of the wildfire wildfire.
Dynamics that impacted demand for air Purifiers, just curious what you're seeing quarter to date when we've looked in the past we've seen a good bump.
To your sales for some of the heightened wildfire seasons. So curious if youre seeing that same sort of dynamic or perhaps.
There's just been more air purifier purchases over the course of Covid and maybe people who want one already have one of the household.
Or if theres area.
New new customers that answer your brand.
Yes.
<unk> purification as we've all seen in the news and experience.
The Canadian wildfires have impacted us mostly in May and June so a lot of that sort of happened after our.
At the end of our first quarter.
I will note U S wildfires are actually below average at this point in the year. If you think about all of the snow heavy snowfall that was out on the west coast. This past winter, it's a slower start well below kind of the second lowest in the last 10 years from a U S standpoint, so hot in Canada that lower in the U S. So you've got some offsets that are happening there.
But that said the air Purifier category point of sale in the last couple of months is up I would say air purification.
Category has some relatively speaking higher retailer inventories we've talked about in the past some pockets, where there is still some higher inventory coming off of Covid and this is one of those examples.
Okay.
Does that that inventory, we did see point of sale increases for the category. We also saw some some elevated quite.
Point of sale in the last four weeks kind of past the end of the first quarter. We do have inventory and we're really as I said in my remarks really pleased to be able to help retailers and consumers. During this time is it is it continues.
Super helpful. Thanks, so much and congrats again.
Great. Thank you.
Our next question comes from the line of Peter Grom with UBS. Please proceed with your question.
Thanks, operator, and good morning, everyone.
One did you follow up and then just kind of.
I guess, just a follow up on <unk>.
The outlook still implies a pretty wide range for earnings, especially considering.
Close to halfway through the quarter at this point can you maybe just help us understand that.
Building blocks between the high end and the low end.
And maybe to keep watch points or is it kind of fair to say that you would probably expect to be at the stronger end of that range and then I guess my real question is just shifting gears to consumer demand, obviously, a lot of concern around what that looks like.
As we move forward, but it seems at least based on what you just delivered this morning that it can be faring better than you expected.
Just broad based question, but your portfolio spans a lot of different categories can you just give us a sense of what youre seeing around the health of the consumer and broader Japan or some categories seeing improved performance quicker than you would've anticipated are somewhat challenged.
And just would be curious how the demand environment is evolving versus your expectations, especially considering that there is some level of the company there good morning Jordan.
The prolonged period of.
<unk> top line growth. Thanks.
Hi, Peter Julien here. Thanks for the question given there's two parts to it that's split up the answer so Brian .
Well done.
That's off with demand.
Yes, Peter.
The wider range is really centered around investment spending and the timing of that investment spending.
There's a lot of moving parts as you called out when you were asking the question about consumer demand. So we have a lot of initiatives going in a lot of positive momentum going in the right direction on things like the traveler and those sorts of things the timing of when that gets into the retailer and when we really want to drive demand can fluctuate between the second quarter.
The third quarter and so on and so there is a.
A range of outcomes for the second quarter that is largely based on the timing of our investment spend when it will fall exactly and in a matter of weeks could make it shipped between Q1 and Q2 and that's really what we're dealing with here because that is such a new item and it's actually hitting retail towards the end of the second quarter and it will hit some retail before.
For other retail and so hopefully you can imagine that there is a period of time that could overlap just a matter of several weeks, which could make a difference to the quarters and thats why theres kind of a wide range of outcomes, we can't perfectly predict when the timing will be exactly up all of that and so there's a little bit of a range there for a second.
<unk>.
Great.
And the demand subjects I think the simplest thing we can say is that everyone on the call I think in the market broadly is aware of the choppiness in predictions pressure that's on the consumer at a macro level. So the famous inflation and higher interest rates are higher for longer speech that the fed is reiterated.
A month after month.
And in the case of these categories to your specific question. We're in a broad set of categories. So some of them are just feeling the pain of that discretionary.
Reduction is buying patterns shift others like our outdoor for example are seeing the benefits of the megatrend of outdoors prestige beauty is generally doing better and then the.
World of Cold and flu, it's we're off season right now it's hard to tell.
These things go up and up and down in terms of what it means for US I think the simplest thing I can say is we just reiterated our sales guidance today and all of that was considered when we put that number four.
Great. Thanks, so much I'll pass it on.
Sure our pleasure Peter.
Our next question comes from the line of Susan Anderson with Canaccord Genuity. Please proceed with your question.
Hi, Thanks for taking my question and very nice job on the quarter I was curious on the inventory levels. It's nice to see them down. So much I guess are you guys still working towards your goal to be under $4 million by the end of the year and then just curious on the SKU rationalization and kind of where you like how much of that is completed at this point and how much it is.
For the rest of your book.
Yes, I think we're still on track with our goal of the implied in our cash flow range of $2 50 to 270, obviously to be at the $2 70, we have to be at the.
The $400 million or maybe slightly below if we could end up maybe a little bit higher than that which would put us in the $2 50.
Cash flow range for the year. So I think we're comfortably within that range.
Like I said, we could end up at <unk> by the end of the year. If we do that there will be a good reason for it it will be because we are leaning into opportunities and we want to have the inventory to be prepared to ship to those opportunities and then if we don't have incremental opportunities like that then we'd be likely closer to the 400. So I think we would toggle.
Within that range by the end of the year and we're definitely on track to do that.
And then okay.
And in terms of high rationalization as we mentioned.
Overall, the SKU rationalization initiative.
The wellness portfolio more than the other that's.
That's why the impact was felt the brighter and it did start to impact us in Q1, as we mentioned in the remarks and I would expect to see that kind of continue and it's baked into our outlook for the remainder of the year.
There's choices kind of flow through.
Flow through throughout the remainder of the year again, the emphasis is more on wellness and the others. Although there are some impacts across the board.
As we left we've really got a comprehensive look bottoms up on the entire portfolio.
Great and then if I could just add one follow up on the hair appliances. It sounds like you mentioned that prestige was performing better or was that also in the appliances are you seeing dry box performed better than the lower cost tools and then I was curious I know you rolled out that Lord lower cost tool at Walmart I was curious.
How that's performing and then if theres any nunez also coming in her tools as we kind of look to the back half that to maybe re jumpstart that category. Thanks.
Yeah sure. So inheritable, yes, I would say overall.
Kind of big picture prestige or the higher end hurtful wells are performing better than that.
The kind of mid tier hurtful.
Dry bar et cetera in that.
That round is performing stronger as you think about it.
A more affluent consumer having more discretionary spend to be able to continue to purchase and those areas and we do have a lot of new innovation coming out when I mentioned in the remarks on dry bars.
<unk> Shah paddle brush.
And that kind of continues and that one that is.
Inside that that has worked so well for us that's a new one that's coming out there. In addition to a range of various different drive our liquid on when it comes to.
The mass part of the business, we have gotten the new plan O grams and two.
To some of our mass merchandisers that I've mentioned in some of the past quarters and were seeing point of sale pick up very nicely as we've gotten that that new range and so we're encouraged by what we're seeing there.
Great. Thanks, so much good luck the rest of the year.
Thanks, Susan.
Our next question is from the line of Anthony <unk> with Sidoti and company. Please proceed with your questions.
Hey, good morning, Thanks for taking the questions and a nice start to the fiscal year.
So just a quick follow up.
First as far as the SKU rationalization, so I guess if.
If we were to think about this in baseball terms are you guys like in the early innings of that process or middle or how should we think about that.
In terms of cadence of impact Anthony we're in early innings, because we're really just realizing a lower weighted impact in Q1, it'll get a little bit heavier in terms of impact through the remainder of this year. So it just so happens it was kind of spread where the majority of the impactful.
All in this fiscal year, it's a little bit lighter in Q1 and get a little bit heavier.
Q2 through Q4, and then we'll be through it now as we've talked about in the past. This is something we're going to continue to do.
We don't know at this stage it will be meaningful enough that we'll continue to call it out going into fiscal year 'twenty five based on whatever we find through the results of the process, but it will be a continuing process.
That will happen in future years, but the majority of the impact from this initial SKU rationalization effort will be in fiscal year 'twenty four it was a little lighter in Q1, and it'll get a little heavier in the remaining quarters.
Got it if I could squeeze one more question as far as your outlook for M&A, just how should we think about that and then.
As far as acquisition multiples have you seen any changes.
Yes.
Yeah, So Jack will speak a little bit too acquisition multiples as boiler, whether theyre generally coming down obviously interest rates are going up in valuations coming down it's broadly known but.
But not specific be deal by deal.
Macroeconomy in terms of capital allocation, which is to me the broader question.
We were very pleased that our strategy is working which is to reduce our.
Inventory improve our cash flow you saw that in the numbers that we reported today, where we've made significant progress and not just in this quarter, but now also on top of the big progress that we announced in April for Q4 of last fiscal year as we continue towards the guidance that we reiterated today it opens up possibilities for additional cash.
<unk> deployment, so per our strategy.
<unk> on the form of acquisition.
Also the potential for opportunistic buyback and we consider these things all the time.
In the case of operational needs, we don't beyond the big warehouses have another biggie in the short term so that helps us as well.
This is Jack on the subject of what's out there yeah. So Anthony we're seeing.
Our deal flow has been picking up recently than maybe over the last six months.
And expect that there will be even more as.
Good.
Rest of the balance of this year continues I think for US we're going to continue to stay in touch we're going to look at the different options that are out there are part of when it's right for us to do it is going to be.
When the organization is ready, but we're still in the in the midst of.
Project Pegasus is going really well and what we don't want to do is.
Create any additional compression, we'd rather do that well do it right and then you know what.
Some of our priorities are to get.
Debt levels down that being said, we're seeing with some of the assets that are transacting out there we are seeing multiples coming down as Julian has mentioned and expect that.
We have good assets will probably cost.
Multiple a higher multiple than others, but in general we're seeing multiples going down.
Understood. Thank you and best of luck.
Alright, let her Anthony.
Thank you.
Final question is from the line of Linda Bolton Weiser with D. A Davidson. Please proceed with your question.
Hi, Linda.
Hi, Hello, congratulations on a nice quarter.
So I was wondering on the gross margin expansion. It was really strong and you mentioned there were some there was a benefit from lower EPA repackaging costs is there any way to quantify the rest of the expansion like how much like next.
What was the net of the freight or commodities is there any way to quantify the hole.
Gross margin expansion in the quarter.
I mean, we gave you I think it was 180 basis points of expansion related to the EPA the lack of having those costs year over year. So that's roughly half I think you could a little less than that actually I think you could split the remainder up between.
<unk>.
You know the margin benefits and commodity and freight costs I think it's fair to kind of do a 50 50 split of the of the remainder.
Okay, and then I think you kind of mentioned somewhere in your in your commentary about the facility rationalization those excess.
Distribution facilities that you have now is there any.
Additional movement on what might be done with those are or anything to report on that front.
I would say there there are there.
They are at different stages in the process. There is one the smaller of the two that is further along.
Each have formal indications of interest and are working towards.
Something thats more definitive and we're making good progress on that one so I would say there is one that if we can make everything aligned.
There could be a closing in the third quarter and then the other one is not as far along but we are still moving on a very good path and.
You know we'll report if we have something to report we'll share that with you at the appropriate time, but we're making good progress on both.
There is a big picture comment here, we've been saying for a couple of quarters that with the opening of our new state of the art Big facility. The 2 million square footer in Tennessee. It creates these opportunities. So hopefully people are not surprised at where now.
Optimizing I think that's where we've used multiple quarters the footprint. So there's multiple possibilities as Brian was talking about and I think it's good news. It's good for ROIC. It's good for efficiency and then ultimately good for costs.
Great and then finally can I just ask on the hydro flask on the consumer shifts in preference from bottles tumblers like what exactly is driving that is that more in sedentary behavior.
Instead of the bottle well what is driving the underlying consumer preference at this point.
Yeah.
My feeling.
Linda is.
The functionality of it for a range of different activities that the consumers taking on I mean, I think probably one of the biggest ones is sitting in our cup holder.
So as consumers are going from activity to activity, whether that's to the office or two kids sporting events or to the gym or the grocery store.
Namely.
The activities that your average consumer is kind of transporting themselves or their families around.
Fitting into our cup holder, having a handle the ease and the preference of drinking from a strong I think.
Combination of things now any one of those things.
Can be available and in a bottle, but there's you know there's something about this particular traveled humbler design that kind of encapsulates all of them and one that's in the Cup holder has the handle has the straw and it just it's just really really resonated.
In fact in the consumers' lives.
Got it thank you very much.
Our pleasure Linda Thank you.
Thank you. This concludes our question and answer session and I will turn the floor back to management for closing remarks.
Thank you operator, and thank you everyone for joining us today, we're very excited about the quarter and beginning to demonstrate.
Demonstrate the consistency that I know everyone is looking for starting with US we look forward to speaking with many of you in the coming days and weeks. There are several forums, whether there are conferences or <unk> were out of our quiet period now. So we're looking forward to you and talking about them sorry, Jonathan during those in <unk>.
Also other conversations with many of who would like them. So with that we say, thank you and have a wonderful day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.