Spectrum Brands Holdings, Inc.’s SPB strategic efforts to efficiently manage its business portfolio are commendable. Also, the company boasts a robust brand portfolio and remains committed toward maximizing its shareholders’ value by efficient capital allocation.
However, the company’s dismal surprise history and strained margins in the last few quarters have weighed on its price performance. Spectrum Brands’ shares have lost 8.4% in the past three months, wider than the industry’s decline of mere 0.4%.
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So, let’s delve deep to see whether the company’s strategic initiatives can help lift its stock performance.
Strategies Aiding Growth
Spectrum Brands manages its portfolio through acquisitions and divestitures. In sync with its strategy of allocating capital efficiently through organic investments and acquisitions, the company is divesting its Global Batteries & Appliances (“GBA”) businesses. It has already inked a $2-billion cash deal with Energizer Holdings, Inc. ENR to offload the Global Battery and Lighting Business or Battery Business. The divestiture proceeds will be used for debt reduction, reinvestment in core businesses and share buybacks.
Moreover, management plans to redirect the capital invested in the GBA business toward development of its remaining four businesses, including Hardware & Home Improvement, Global Auto Care, Global Pet Supplies and Home & Garden. These actions are likely to strengthen the company’s operating structure and boost profitability.
Spectrum Brands has also agreed to merge with HRG Group, Inc. HRG — its largest shareholder with 60% controlling stake. Valued at $10 billion, this transaction is expected to close by end of second-quarter 2018 and should result in the wind down of HRG Group. Spectrum Brands’ management team is likely to direct the combined company and HRG’s board will be replaced by its board. Also, Spectrum Brands’ shareholders will receive one share of the combined company in exchange of a share of Spectrum Brands held by them before the merger. This move is expected to improve the company’s shareholder base and governance structure, thereby creating meaningful value for its shareholders and driving overall growth.
Also, Spectrum Brands’ shareholder-friendly moves remain noteworthy. Recently, management authorized a new three-year share repurchase program worth $1 billion by replacing the existing three-year program that has $93 million remaining. Further, the company paid dividends of $48.5 million in the first half of fiscal 2018.
Concerns
Despite the aforementioned tailwinds, the company failed to impress investors on the top- and bottom-line front. Spectrum Brands has lagged earnings estimates in four of the last five quarters, while sales missed estimates in six of the trailing seven quarters. This dismal surprise history also continued in second-quarter fiscal 2018, where challenges related to the company’s two greenfield manufacturing and distribution projects hurt results. Furthermore, Spectrum Brands’ pet business was persistently affected by the exit of a European pet food customer. Additionally, external cost headwinds and mix adversely impacted results.
Consequently, Spectrum Brands lowered its EBITDA guidance for fiscal 2018. Management expects fiscal 2018 adjusted EBITDA from continuing operations to be approximately $600-$617 million, down from the previous guidance of $657-$674 million, and $639 million in fiscal 2017.
Spectrum Brands has also been witnessing strained operating margins due to higher operating and SG&A expenses. Evidently, operating margin contracted 830 basis points (bps) in second-quarter fiscal 2018, followed by declines of 490 bps, 450 bps and 310 bps in the first quarter of fiscal 2018, fourth and third quarters of fiscal 2017, respectively. This, in turn, is hurting the company’s profitability and remains a deterrent, going ahead.
To Conclude
We believe that Spectrum Brands’ strategic actions will take time to reflect in the quarterly results. However, this Zacks Rank #3 (Hold) stock has a Value Score of A and a long-term earnings growth rate of 13.6%, which is impressive.
Meanwhile, you may count upon Ollie's Bargain Outlet Holdings, Inc. OLLI, a Zacks Rank #2 (Buy) stock, which has a long-term earnings growth rate of 23%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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