Spectrum Brands Holdings, Inc. SPB posted solid third-quarter fiscal 2015 results, wherein both the top and bottom lines improved year over year and exceeded expectations.
The third quarter was characterized by the company’s exit from non-profitable ventures, robust cost-saving activities, leveraged operating expenses, solid contributions from new product launches and successful integration of acquired businesses, all of which enabled it to battle currency headwinds.
This Zacks Rank #2 (Buy) company’s adjusted earnings of $1.42 per share jumped 9.2% year over year and beat the Zacks Consensus Estimate of $1.40, backed by acquisition-related gains and enhanced mix. However, the bottom line was somewhat impacted by adverse currency movements.
On a GAAP basis, the company reported earnings of 79 cents per share, down 46.3% from the prior-year quarter.
Further, record results at the company’s Home & Garden segment, robust European volumes, and solid personal care and small appliances’ results drove net sales which advanced 10.5% year over year to $1,247.5 million. Net sales also surpassed the Zacks Consensus Estimate of $1232.2 million.
Excluding the impact of foreign currency translation and acquisition-related sales, organic sales grew 3.7% year over year.
Further Insight
Spectrum Brands’ gross profit improved 8.9% year over year to $458 million. However, gross margin contracted 30 basis points (bps) to 26.7% due to currency headwinds.
The company’s adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) surged 16.8% to $236.2 million, with the adjusted EBITDA margin expanding 100 bps to 18.9% during the third quarter. This was attributable to operating expense leverage, better mix and gains from acquisitions.
Other Developments
The company acquired Armored AutoGroup Parent Inc. (Armored AutoGroup) on May 21, 2015, following which it formed a new reporting segment called Global Auto Care.
Segment Details
Sales at Spectrum Brands’ Global Batteries & Appliances segment came in at $459 million, up 7.2% from the year-ago quarter. On a currency neutral basis, net sales rose 3% as strong sales of personal care and small appliances compensated for lower battery revenues. The segment’s adjusted EBITDA came in at $60.1 million, down 10.3% from the year-ago quarter. Adjusted EBITDA margin contracted 40 bps to 13.1%. On a currency neutral basis, however, adjusted EBITDA witnessed double-digit growth.
Backed by acquisition-related sales, the company’s Global Pet Supplies segment’s sales soared 36.9% year over year to $208.3 million. However, on excluding acquisition-related sales and including the impact of currency fluctuations, sales at the segment came in at $150.4 million. Sales bore the brunt of persistent weakness in aquatics sales in North America owing to discontinued low-margin promotions. Adjusted EBITDA at the segment soared 25.1% to $38.4 million, with the margin witnessing a contraction of 180 bps to 18.4%.
The Home & Garden segment witnessed record results, with sales jumping 15.9% year over year to $202.3 million, primarily driven by greater sales in the lawn and garden controls, repellents and household controls categories. This, in turn, was backed by retail distribution gains coupled with higher replenishment orders. Adjusted EBITDA at the segment displayed a spectacular 20.9% improvement to $62.4 million, with the margin improving 120 bps to 30.8%.
Spectrum Brands’ HHI segment’s sales rose 2.2% to $313.5 million, mainly driven by improved sales in the U.S. residential security and plumbing categories, combined with significant contribution from Tell Manufacturing. On a currency neutral basis, sales grew 3.8%. Sales in the quarter were also hurt to an extent by exit from non-profitable businesses and termination of a customer tolling deal. The segment’s adjusted EBITDA of $62.6 million rose 4.7% year over year, while the adjusted EBITDA margin expanded 50 bps to 20.0%.
The latest Global Auto Care segment’s sales and adjusted EBITDA came in at $64.4 million and $19.2 million, respectively. Adjusted EBITDA margin was 29.8% in the quarter. Results were driven by retail distribution gains in the U.S. along with new product introductions at Armor All and STP, partly offset by unfavorable weather which impacted the shipment timing of A/C PRO.
Financials
Spectrum Brands ended the quarter with solid cash balance of $107.2 million and approximately $400 million under its Cash Flow Revolver. Total debt outstanding at the end of the third quarter of fiscal 2015 was nearly $4,346 million.
Fiscal 2015 Outlook
Going forward, Spectrum Brands intends to remain focused on accelerating sales via global expansion, innovations, introduction of new product categories and an increasing customer base. Also, after successfully integrating Salix Animal Health, IAMS and the Eukanuba pet food business, Spectrum Brands is set to execute seamless integration of its newly acquired Global Auto Care in order to boost worldwide sales.
Spectrum Brands reiterated its guidance for fiscal 2015. The company expects net sales to grow by mid-single digits, compared with fiscal 2014. Sales in fiscal 2015 are expected to benefit from recent acquisitions, including that of Tell Manufacturing in Oct 2014, the European pet food business in Dec 2014, Salix Animal Health in Jan 2015, and Armored AutoGroup in May 2015. Additionally, results will bear a negative impact of 500–600 bps from the lingering foreign exchange headwinds.
For fiscal 2015, the company envisions free cash flow generation of roughly $440 million. Capital expenditures during the fiscal are expected to range from $75–$85 million. All these initiatives are anticipated to enhance the company’s margin structure and boost its organic sales in the coming years.
Stocks to Consider
Other well-ranked stocks in the same sector include Nutrisystem, Inc. NTRI, sporting a Zacks Rank #1 (Strong Buy), Central Garden & Pet Company CENT and The Container Store Group, Inc. TCS, each carrying a Zacks Rank #2.
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