Newell Rubbermaid Inc. (NWL), the producer of Sharpie pens and Rubbermaid containers, posted third-quarter 2014 adjusted earnings of 58 cents a share that surpassed the Zacks Consensus Estimate of 55 cents and rose 11.5% year over year. The increase in bottom line was due to higher sales, increased gross margin improvement, diminished tax rate and reduced share count, partly offset by unfavorable foreign currency translations and heightened back-to-school advertising and promotion costs.
On a reported basis, including one-time items, the company reported earnings of 44 cents per share, down over 33% from the prior-year quarter.
This Zacks Rank #3 (Hold) stock’s net sales rose 1.3% to $1,484.5 million from the year-ago quarter but fell short of the Zacks Consensus Estimate of $1,526 million. Core sales, excluding a negative impact of 200 basis points (bps) from foreign currency translation and 60 bps from Ignite acquisition, climbed 2.7%, reflecting sales growth across Writing, Tools and Commercial Products segments.
Writing net sales rose 2.5% to $453.2 million, while core sales increased 8.3%; Tools segment net sales increased 2% to $214.8 million, whereas core sales grew 2.3%; and Commercial Products net sales jumped 11.1% to $218.0 million, while core sales grew 11.3%. However, these were partially offset by a decline of 1.4% in Home Solutions net sales of $417.0 million (3.2% fall in core sales) and 6.5% decline in Baby & Parenting net sales of $181.5 million (5.8% decline in core sales).
Newell’s gross profit increased 4.4% year over year to $576.7 million, whereas gross margin expanded 110 bps to 38.8%. Adjusted gross margin increased 140 bps to 39.2% owing to improved productivity, pricing and favorable segment mix, partly offset by cost inflation and negative foreign currency translations.
Adjusted operating income declined 1.7% year over year to $212.9 million while operating margin dipped 50 bps to 14.3%. The fall in operating margin was mainly related to a 190 bps increase in SG&A expense as a percentage of revenue due to increased advertising and promotion expenses for the back-to-school season.
Other Financial Details
Newell ended the quarter with cash and cash equivalents of $132.6 million, long-term debt of $1,418.7 million, and shareholders’ equity of $2,029.0 million.
As of Sep 30, 2014, the company generated operating cash flow of $343.3 million, incurred capital expenditures of $101 million and paid dividend of $136.1 million. During the quarter, the company bought back 3.3 million shares for $103.9 million.
During the quarter, the company successfully completed the acquisition of Ignite Holdings LLC and announced the acquisition of bubba brands inc., closed in October. The company expects to generate over $175 million in net sales from these acquisitions in 2014.
Further, in an effort to streamline its portfolio, the company announced its intention to divest its Endicia online postage and Calphalon retail outlet stores and kitchen electrics businesses.
Other Developments
During the quarter, the company announced the next phase of its Project Renewal Program primarily focused on saving costs in the areas of procurement, manufacturing and distribution, and through further overhead reduction. As part of the extended program, the company expects to save an additional $200 million annually by reducing the complexity of its business and simplifying the process of procuring products. The company hopes to achieve the targeted savings under the extended program by the end of 2017.
On the other hand, the company anticipates cumulative costs of the extended program to the tune of $540 to $575 million pretax, including cash costs of $510 to $540 million. The company expects to use the new savings from the program to strengthen capabilities and its brand position in the fast growing emerging markets of Latin America and Asia.
Further, the company remains on track to achieve annual cost savings of nearly $270 to $325 million from the first two phases of the Project Renewal program by mid-2015.
Reaffirmed Outlook
Newell reiterated its full-year adjusted earnings projection of $1.94–$2.00 per share. The company’s 2014 adjusted earnings forecast excludes expenses worth $100–$120 million related to Project Renewal restructuring and other restructuring activities. The current Zacks Consensus Estimate for 2014 is pegged at $2.00, which is at the higher end of the projected guidance.
Further, Newell maintained its core sales growth projection of 3%–4% and still expects an improvement of up to 40 bps in 2014 operating margin.
Newell expects to generate operating cash flow in the range of $600–$650 million in 2014, with planned capital expenditure between $150 million and $175 million.
Other Stocks to Consider
A better-ranked stock in the same industry is WD-40 Company (WDFC), carrying Zacks Rank #1 (Strong Buy). Other stocks, that warrant a look in the broader retail space, include L Brands Inc. (LB) and Abercrombie & Fitch Co. (ANF), both sporting a Zacks Rank #1.
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