Energizer Runs Low in 4Q - Analyst Blog

Energizer Holdings Inc. (ENR) reported fourth quarter 2010 non-GAAP earnings of 81 cents per share, well below the Zacks Consensus of 95 cents, based on weak revenue growth in the quarter.

Including charges and one-time items, earnings came in at $1.20 per share in the quarter, well above the Zacks Consensus Estimate of 95 cents and up 126.4% year over year from 53 cents in the prior year quarter.

Energizer reported earnings per share of $5.60 for the fiscal 2010, on a non-GAAP basis. On a GAAP basis, earnings were $5.72 per share, up 21.2% y/y from $4.72 reported in the prior year.

Gross margin was 46.6%, compared with 43.9% in the year-ago quarter, and was favorably impacted by 40 basis points due to currency impact.

Although spending on advertising and promotion (A&P) increased 27.2% year over year (14.2% of total third quarter 2010 revenue versus 11.0% in the year-ago period), profits improved due to lower product costs.

Revenue

Revenues declined 2.0% year over year to $1.06 billion in the fourth quarter, due to lower net sales in the Household Products and Personal Care segments. This was well below the Zacks Consensus Estimate of $1.12 billion.

Energizer reported strong growth for fiscal 2010, with revenues increasing 6.0% year over year to $4.25 billion, but below the Zacks Consensus Estimate of $4.31 billion.

The weak revenue growth in the quarter was primarily attributed to declines in wet shave products and shave preparations, partially offset by higher Schick Hydro shipments. Difficult economic conditions in Venezuela also contributed to the decline, reducing quarterly revenues by approximately $13.0 million.

Household revenues declined 2.0% year over year to $566.3 million, primarily attributable to challenging economic conditions in Venezuela. Volume gains and favorable timing of holiday shipments were offset by the continued negative pricing impact of pack upsizing.

The premium alkaline category achieved year-over-year unit growth. However, it was down on a dollar basis due to the negative pricing impact of pack upsizing in the US.

Management noted that battery consumption remains sluggish and the effect of an increasing number of devices using built-in rechargeable battery systems, particularly in the developed markets and heightened price competition have hurt battery sales.

Energizer's board of directors authorized a multi-year program aimed at improving the company's competitive prowess. According to the plan, Energizer will accelerate its investments in both geographic and product growth opportunities going forward.

The restructuring plan is expected to result in pre-tax charges in the range of $65.0 million to $85.0 million over the next twelve months.

Personal care revenues declined 2.0% year over year to $493.4 million, due to the unfavorable impact of foreign exchange volatility and difficult economic conditions in Venezuela.

Wet shave sales were flat in the quarter, as higher volumes from Schick Hydro were offset by declines in shaving products and lower sales of Edge and Skintimate. Skin Care sales increased 9.0% year over year, while Feminine Care sales decreased 9.0% year over year on lower sales of Gentle Glide. Infant Care sales were flat year over year in the quarter.

Balance Sheet & Cash Flow

Energizer's debt-to-EBITDA-ratio for the last four quarters was 2.708 to 1.00. This ratio includes the negative impact of Venezuelan currency devaluation as a reduction of EBITDA. As of September 30, 2010, the company's debt was $2.31 billion, with $2.14 billion, or 92%, at fixed rates averaging 5.20%.

Capital expenditures were $34.9 million in the fourth quarter as compared with $25.3 million in the prior quarter.

Guidance

Management did not provide any earnings forecast for the first quarter of 2011.

However, Energizer expects raw material and commodity costs in the range of $20 million to $30 million, having an unfavorable impact on fiscal 2011 results as compared with fiscal 2010, primarily due to higher zinc and steel costs.

Energizer expects a favorable impact from foreign currency fluctuations in the range of $20.0 million to $30.0 million for the fiscal 2011. 

Energizer plans to spend approximately 11.5% to 12.0% of net sales on advertising & promotion for fiscal 2011.

Our Take

Despite a weak fourth quarter, we continue to expect strong top-line growth for Energizer going forward. Moreover, we believe that the company will benefit from its restructuring initiatives, product innovations and strong balance sheet in the near term.

However, intense competition from Panasonic Corp. (PC) and Procter & Gamble Co. (PG), inventory destocking and weak consumer environment are potential negatives.

Energizer is currently a Zacks #2 Rank stock (short-term Outperform rating) and has an Outperform rating over the long term.

 
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