Energizer (ENR) Misses on Q3 Earnings Due to Higher Spending

Energizer Holdings Inc. (ENR) reported third-quarter fiscal 2014 non-GAAP earnings of $1.46 per share, which missed the Zacks Consensus Estimate by 9 cents. Earnings per share (EPS) decreased 7% year over year due to higher expenses on brand promotion.

Revenues

Revenues inched up 1.7% from the year-ago quarter to $1.13 billion, which marginally beat the Zacks Consensus Estimate of $1.12 billion. The year-over-year growth was driven by additional sales from the feminine care brand acquisition and organic growth within the Personal Care segment.

Personal Care (63.6% of revenues) increased 10.6% year over year to $718.3 million. Organic net sales increased 1.9% driven by higher Sun Care sales and growth in women's razor and blade systems revenues. Acquisition contributed revenues of $56.6 million in the quarter.

Within Personal Care, Energizer launched several products namely Hydro Groomer, Hydro Sensitive formulations and Playtex Sport Fresh Balance. In Sun Care, the company continued to invest in the Banana Boat Protect and Hydrate platform and Hawaiian Tropic Self Hydration.

Household products decreased 10.9% from the year-ago quarter to $411.7 million. Organic net sales decreased 9.5% due to loss of distribution within two U.S. retail customers, higher promotional spending, increased competitive activity and pricing controls and inventory import restrictions in certain Latin American countries.

In Household products, Energizer is investing in Energizer Max with Power Seal technology, which is currently being rolled out in the U.S.

Margins

Gross margin for the quarter expanded 180 basis points (bps) to 47.7%, driven by savings from 2013 restructuring program and higher pricing within the Personal Care segment.

However, Energizer’s results were negatively impacted by higher expenses. Selling, general & administrative expense (SG&A) climbed 10 bps, while advertising & sales promotion expense expanded 340 bps. Research & development expense declined 10 bps in the reported quarter.

Personal Care segment profit increased 0.8% year over year to $112.2 million. Acquisition contributed profit of $6.7 million in the quarter. Household products segment profit decreased 15.9% year over year to $84.2 million.

Adjusted net income was $90.8 million or $1.46 compared with $99.3 million or $1.57 reported in the year-ago quarter.

Balance Sheet

In the third quarter, working capital as a percent of revenues was 15.4%, an improvement of 270 bps versus 2013 year-end results and a 750 bps reduction from the 2011 baseline period established at the beginning of the initiative. Total cash flow generated by Energizer’s working capital Initiative now exceeds $300 million.

2013 Restructuring Project

Restructuring savings in the quarter increased approximately $32 million from the year-ago quarter. The primary impacts of savings were reflected in improved gross margin in Household Products and lower overhead expenses. Project-to-date savings are estimated to be over $220 million.

For the fiscal year, Energizer estimates gross savings to increase approximately $135 to $150 million year over year. As a result, the estimated cumulative total project gross savings are expected to be in the range of $235 to $250 million at the end of fiscal 2014.

The company expects total project gross savings to be approximately $300 million. The incremental savings are expected to be realized throughout fiscal 2015 and 2016 and the total run rate impact is expected to be realized in fiscal 2016.

Restructuring related charges are estimated to be $115 to $125 million for fiscal 2014 bringing project-to-date costs to $270 to $280 million.

Spin-off Program

On Apr 30, 2014, Energizer announced its intention to separate the company’s Household Products and Personal Care divisions into two independent, publicly traded companies. The spin-off is planned as a tax-free spin-off to the company's shareholders and is expected to be completed in the second half of fiscal 2015 (by Jul 1).

Energizer believes that creating two public companies offers a number of benefits to the standalone businesses. Following the separation, each standalone company will be able to focus on its distinct commercial priorities and allocate its own resources to meet the needs of its business.

Household Products, with batteries and portable lighting products, is expected to generate strong margins and significant cash flows going forward. Personal Care, on the other hand, is expected to be a leading pure-play consumer products company with an attractive portfolio of well-established brand names.

Guidance

For the fourth quarter, organic sales are expected to remain flat with the year-ago quarter. Personal Care organic sales are forecasted to remain flat, while Household products sales is expected to stabilize.

For the fiscal year, organic net sales are expected to decline in the low- to mid-single digits. Personal Care organic net sales are expected to decline in the low-single digits, while Household products organic net sales are expected to decline in the mid-to-high single-digits.

Advertising & promotion, as a percentage of sales, is expected to be in the range of 10.5% to 11%, up 100 bps from 2013.

Energizer expects fiscal 2014 adjusted earnings to be in the range of $7.00 to $7.25 per share. The feminine care brands acquisition is expected to accretive in the range of 35 to 40 cents for the fiscal year. Spin-off transaction related charges are estimated to be $25 to $30 million for the fiscal 2014.

Our Take

We believe that product innovations coupled with higher pricing and restructuring initiatives will drive results in the long run.

Moreover, its prudent product mix would expand margins in the near term. Also, the company’s partnership with Unilever’s (UN) AXE brand is expected to result in market share gains, going forward. Apart from this, the company’s acquisition strategy is expected to reap benefits.

However, the expected decline in volumes in Household product segment, unfavorable foreign exchange and increasing competition from companies such as Kimberley-Clark Corp. (KMB) and Procter & Gamble Co. (PG) are the near-term headwinds.

Further, heightened spending on advertising & promotion will hurt profitability in the near term.

Currently, Energizer carries a Zacks Rank #3 (Hold).