Spectrum Brands Gains From Pricing & E-commerce Efforts

Spectrum Brands Holdings Inc. SPB appears in good shape, thanks to its robust strategic efforts. The company's Global Productivity Improvement Plan, which aims at improving the operating efficiency, is encouraging too. Solid gains from pricing, cost improvements and favorable mix have been aiding its margins for a while now. Its e-commerce unit also bodes well.

Analysts seem optimistic about the company's earnings potential. The Zacks Consensus Estimate for fiscal 2024 and fiscal 2025 earnings per share is pegged at $4.78 and $6.21, respectively.  While the figure for fiscal 2024 indicates a sharp increase year over year, the metric for fiscal 2025 implies a rise of about 30%.

Let's Delve Deep

Spectrum Brands is on track with its growth initiatives. In this regard, the company is streamlining its organizational structure and re-energizing its employee base. It is committed to improving operational efficiencies through limiting risk. Management is protecting and deleveraging its balance sheet while solidifying liquidity. As part of its strategic transformation, the company completed the sale of its HHI business to ASSA ABLOY for $4.3 billion in cash on Jun 20, subject to customary purchase price adjustments. With the sale of the HHI business, SPB has been strongly focusing on its core businesses and delivering sustainable growth.

The company is experiencing sturdy momentum in its e-commerce business, which continued during the fiscal third quarter, with more than 20% growth year over year. E-commerce sales accounted for more than 21% of the total sales in the quarter. We note that each of the company's businesses delivered double-digit e-commerce sales, with the Home & Personal Care (HPC) segment leading the way with an e-commerce sales increase of more than 33%. The investment in the segment's digital marketing and activation led to the highest Amazon Prime Day sales ever for the unit. Management assumes that e-commerce sales across the businesses will be strong, with sales recovery in small kitchen appliances and global aquatics to continue.

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The company has been proactive in its cost-takeout actions, including fixed cost reduction by lowering advertising and promotional spending. It is focused on a disciplined cost structure. During the fiscal third quarter, gross profit advanced 14.9% year over year, driven by lower cost inventory and inventory-related costs and other cost improvements. Meanwhile, the gross margin expanded 310 basis points (bps) year over year to 38.9%. The adjusted EBITDA margin expanded 20 bps year over year to 13.6%, driven by better gross margins and higher sales.

In addition, the company is focused on boosting its top-line results through investments in commercial capabilities. It has been making significant investments in brand-focused advertising, marketing and innovation. In the fiscal third quarter, SPB made investments of around $23 million, up year over year, in brand advertising and innovation. It is on track to invest $50 million more during the current fiscal year. Management highlighted that the company's internal teams and advisers made the dual-track process of the separation of the HPC business, preparing the division for sale, merger or spin-off transaction.

Bottom Line

Spectrum Brands has been grappling with geopolitical and macroeconomic uncertainty for a while now. In addition, soft demand in the small kitchen appliances category, volume declines in certain pet channels and the impact of SKU rationalization decisions are likely to continue to act as headwinds. Also, foreign currency translations act as deterrents.

Nevertheless, the aforesaid strengths are likely to continue to boost overall growth. Going forward, the company is likely to see sturdy consumer demand for household and repellent categories. For fiscal 2024, Spectrum Brands still projects reported sales to remain relatively flat year over year. It expects sales growth in the second half of the fiscal year. Adjusted EBITDA, excluding the investment income, is likely to grow nearly 20%. Over the past six months, this Zacks Rank #3 (Hold) stock has gained 12.4% compared with the industry's 13.9% growth.

Key Picks

We have highlighted three better-ranked stocks, namely G-III Apparel Group GIII, Royal Caribbean RCL and Gildan Activewear GIL.

G-III Apparel is a manufacturer, designer and distributor of apparel and accessories under licensed brands, owned brands and private label brands. It sports a Zacks Rank #1 (Strong Buy) at present.

GIII Apparel has a trailing four-quarter earnings surprise of 571.8%, on average. The Zacks Consensus Estimate for GIII Apparel's current financial-year sales indicates growth of 3.3% from the year-ago figure.

Royal Caribbean carries a Zacks Rank of 1 at present. RCL has a trailing four-quarter earnings surprise of 18.5%, on average.

The Zacks Consensus Estimate for RCL's 2024 sales and earnings per share indicates an increase of 18.1% and 69.9%, respectively, from the year-ago reported levels.

Gildan Activewear, a manufacturer of premium quality branded basic activewear, carries a Zacks Rank #2 (Buy) at present. GIL has a trailing four-quarter earnings surprise of 5.5%, on average.

The consensus estimate for Gildan Activewear's current financial-year earnings per share indicates growth of 13.6% from the year-ago corresponding figure.

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