Helen of Troy Limited (HELE) Q3 2009 Earnings Report, Transcript and Summary

Good morning and welcome, ladies and gentlemen, to the Helen of Troy third quarter conference call for fiscal 2009. (Operator Instructions) Our speakers for this morning's conference call are Gerald Rubin, Chairman, Chief Executive Officer and President, Thomas Benson, Senior Vice President and Chief Financial Officer, and Robert Spear, Senior Vice President and Chief Information Officer I will now turn the conference over to Robert Spear. Please go ahead, sir.

Good morning, everyone, and welcome to Helen of Troy's third quarter financial results conference call for FY '09. The agenda for this morning's conference call will be as follows: We'll have a brief forward-looking statement review, followed by Mr. Rubin, who will discuss the third quarter earnings release and related results of operations for Helen of Troy, followed by a financial review of our income statement and balance sheet for the quarter by Tom Benson, our Chief Financial Officer. And finally, we'll open up for a question-and-answer session following that for those of you with any further questions. First, the safe harbor statement. This conference call may contain certain forward-looking statements that are based on management's current expectations with respect to future events or financial performance. A number of risks or uncertainties could cause actual results to differ materially from historical or anticipated results. Generally, the words anticipates, believes, expects and other similar words identify forward-looking statements. The company cautions listeners to not place undue reliance on forward-looking statements. Forward-looking statements are subject to risks that could cause such statements to differ materially from actual results. Factors that could actual results to differ from those anticipated are described in the company's Form 10-Q filed with the Securities and Exchange Commission for the year ending February 28, 2008. Additionally, we'd like to say that this conference call may also include information that may be considered non-GAAP financial information. These non-GAAP measures are not alternative to GAAP financial information and may be calculated differently than the non-GAAP financial information disclosed by the company. The company cautions listeners not to place undue reliance on forward-looking statements or non-GAAP information. Before I turn the conference call over to our Chairman, Mr. Rubin, I'd like to inform all interested parties that a copy of today's earnings release has been posted on our website at www.hotus.com. The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures. The release can be accessed by selecting the Investor Relations tab on our home page and then the News tab. I will now turn the conference over to Gerald Rubin, Chairman, CEO and President of Helen of Troy.

Good morning, everybody, and welcome to our third quarter conference call. Helen of Troy Limited today reported sales and net earnings for the quarter ended November 30, 2008. Third quarter sales were $185,619,000 million versus sales of $210 million in the same period of the prior year, a decline of 11.8%. Sales for the nine months ended November 30, 2008 were $484 million versus sales of $508 million for the previous year, a decline of 4.8%. The decline in sales reflects the impact of the deteriorating global economic conditions on the retail consumer, a compressed and highly promotional holiday shopping season in the United States, and the strengthening of the U.S. dollar against other currencies in which we transact sales which resulted in comparatively less reported U.S. dollar sales. Third quarter net earnings were $15,090,000 or $0.48 per fully diluted share compared to $22,842,000 or $0.73 per fully diluted share for the same period a year earlier. Net earnings for the quarter were negatively impacted by foreign exchange losses that reduced year-over-year quarter earnings by $5 million. Net earnings were positively impacted by the settlement of our U.S. Internal Revenue Service tax audit for the fiscal year 2005, which resulted in a benefit to tax expense of $461,000 for the quarter ended November 30, 2008. For the quarter, sales in our Housewares segment decreased 4.3% to $45,301,000 compared with $47,356,000 for the same period last year. Housewares third quarter sales were impacted by the factors previously mentioned and the liquidation of Linens N Things during the quarter, which resulted in a loss of sales to this customer. In addition, we also believe that negatively impacted other competing retailers by diverting consumer purchases to Linens N Things' deeply discounted merchandise. Net sales in the Housewares segment for the nine months ended…

Thank you, Gerry, and good morning, everyone. In the third quarter we experienced a year-over-year sales decline of 11.8%. Gross profit margins declined by 3.2 percentage points year-over-year. Third quarter selling, general and administrative expense as a percentage of sales increased by 0.6 percentage points year-over-year, primarily the result of appreciation of the U.S. dollar in relation to other currencies in which we transact sales which have a $5.3 million negative impact on SG&A year-over-year. We acquired the rights to the Ogilvie brand of home permanent and hair straightening products from Ascendia Brands for $4.77 million during the quarter. We liquidated $24.2 million of auction rate securities at par during the quarter. Subsequent to quarter end we amended our $50 million revolving credit agreement, which extended the maturity date from June 1, 2009 to December 15, 2013 and adjusted certain other terms. And finally, the company reached a settlement agreement with the IRS for fiscal 2005 resulting in adjustments to fiscal 2005 taxes of $490,000 and the reversal of $3.15 million of tax provisions. Of the $3.15 million tax provisions, $460,000 was credited to fiscal year 2009 tax expenses and $2.69 million was credited to additional paid in capital. Net sales for the third quarter of fiscal 2009 were $185.6 million compared to $210.3 million in the third quarter of fiscal 2008. This is a decrease of $24.7 million or 11.8%. The net sales decline reflected the impact of deteriorating global economic conditions on the retail environments in most of our markets, a reduction in inventory levels maintained by key retail partners, a compressed and highly promotional holiday shopping season in the U.S., the strengthening U.S. dollar against other currencies in which we transact sales which resulted in an increase to reported U.S. dollar sales of $6 million or 2.9%…

Operator, we'd like to open up the conference call.

Thank you. (Operator Instructions) Your first question comes from Doug Lane - Jefferies.

Tom, can you give us an idea of the order of magnitude of December vis-à-vis the total February quarter? Is it the biggest month, the smallest month? Does it account for half the full quarter? Just some sort of magnitude of December versus January and February.

They're all about the same in the fourth quarter.

Did you quantify what the negative foreign exchange impact was to the quarter sales in the November quarter?

Approximately $6 million.

And within the SG&A, those foreign currency adjustments, are they non-cash?

Well, they're due to revaluing our foreign currency assets and liabilities to U.S. dollars so, I mean, the net result is when the day is done we're going to have less U.S. dollars.

But it is a non-cash expense? It's just a true-up based on quarter end exchange rates, right?

Yes, it's based on quarter end exchange rates and it's also based on the collection of payment at a rate different than it was originally put on the books during the quarter.

I know it's a difficult environment out there, but Gerry, can you give us an update on the core business, the appliance business? Do you think you're losing any market share? Are you gaining market share? How does that look, you know, the competitive environment?

I don't think that we've lost or gained any market share. I think it's just that it's slowness at the retail level. One thing that I was looking at on our Housewares segment - which is OXO - had Linens N Things stayed in business and bought what they bought the year before, our sales in the Housewares segment would have been up 6%. So, you know, Linens N Things being a big customer of ours did impact us during that quarter, and that's why we had down sales. But, again, had Linens N Things been in business, based on what they were buying before they closed up, our sales would have been up in the Housewares segment. So that was the biggest impact there. On the appliance end, Linens N Things was not a big customer of ours in appliances, so we weren't affected there.

Do you think the impact from Linens is behind us and would we, I mean, it's still early, but would we look for OXO to be up maybe going forward now that we've cleared the Linens bankruptcy?

We're hopeful of that. Someone has to pick up the business that Linens N Things had. And, of course, we sell to thousands of different stores around the country and the major retailers, so hopefully they'll pick up the business from Linens N Things. But, you know, time will tell how their sales are. Will the customer that used to go to Linens N Things now shop at a competitive place and purchase OXO?

Are Linens' clearing sales pretty much done? I'm just not up to date on that.

I believe that they finished their liquidation sales prior to year end. At least locally here in El Paso they closed down prior to year end.

Your next question comes from Gary Giblen - Goldsmith & Harris. Gary Giblen - Goldsmith & Harris: You mentioned tight inventory controls in the prepared remarks but at the same time December sales have picked up, so is there some ongoing destocking or inventory reduction or is that over now?

As I mentioned, I think it's just that the retailers bought conservatively thinking that they were going to have a poor Christmas, and I think they were just too low on inventory. Even though they might have sold less than the year before, they were really short on inventory, and that's why I think our December sales were good. The retailers needed inventory. We're very happy. Gary Giblen - Goldsmith & Harris: And are you seeing much less inflation on materials and are you able to make a positive look into '09 and see some real benefits there, or do you have to pass that through to retailers pretty much as you capture it from suppliers?

Most of our sourcing comes from Asia, and we believe that after Chinese New Year, which is in January, and factories reopen up some time in February or so, we believe that we'll be getting better prices. But besides the better pricing, the transportation costs are going down because fuel is less. Plastic is less, but the factories have to work through the inventories that they have. So we believe over the next few months that our costs of goods that we source in Asia will be going down. Gary Giblen - Goldsmith & Harris: But do you envision an environment where, because the consumer is price sensitive and the retailers are aggressive, that you would have to pass on any reduced cost of goods rather quickly to the retailers, or do you think you can -

No, I don't see that right now.

I think as prices went up, we weren't able to pass all our price increases on to the retailers, so, as you can see, our margins are down some due to higher prices. And when they go down, it takes an extended period of time before we really benefit from that also. I mean, we have a long lead time on our purchasing so, if we are able to get some lower prices in the next few months, before that really impacts our inventory it's going to take a number of quarters. Gary Giblen - Goldsmith & Harris: And then finally, can you update us on private label? I mean, it sort of got more of a factor before recently, but not too great a factor, so, you know. And then you'd mentioned a retailer that had gone the private label route and then retreated from that after a bad experience, so how is that shaking out now given the ever-weakening economy?

Yes, you know, several retailers always want to try their own brand of merchandise because they think it's more profitable for them, but little by little they do come back and buy branded merchandise because they do get new product, they get our innovations. And so, you know, we're seeing a trend that's not increasing in non-branded merchandise and we're seeing several retailers that are coming back to branded merchandise because that's what customers are buying. So that's not a negative anymore. As a matter of fact, hopefully it'll be a positive over the next year, where we pick up some of that private label business.

Your next question comes from Rommel Dionisio - Wedbush Morgan Securities Inc.

Gerry, when you talk about the December pickup in sales as retailers ordered more product, in that fleshing out more in the Personal Care side or the Housewares side or relatively evenly?

Actually, we saw it in both the Personal Care and the Housewares side both.

And when you reference freight, could you just give us a sense of perspective of the magnitude there? I don't know if you specifically break this out but, if you can, can you break out what percentage, as a percent of sales, what freight is and how much of a delta we can expect in subsequent quarters going forward as freight rates come down?

Well, freight, depending on the product, is, on cost of goods, somewhere around 5% to 10%. And we're looking for reductions anywhere from 10% to 20% in freight rates reduction.

And Gerry, I'm sorry, was that 5% to 10% of sales or 5% to 10% of cost of goods?

No, 5% to 10% of cost of goods.

(Operator Instructions) Your next question comes from Steve Friedman - Wachovia Securities.

I understand the foreign exchange losses that would result, with the strengthening dollar, in less total sales in American dollars, but could you expand a bit on how the foreign exchange losses impacted $5 million on the fourth quarter? Wouldn't your cost of goods have been favorably impacted in some cases? Maybe I'm just confused on it. You can clear it up.

I'm going to turn it over to Tom but, you know, our purchasing is done in U.S. dollars. It's just that our sales and accounts receivable in all the countries of the world that we sell in are based on their currency. And so Tom will explain that as that changes, where, you know, for example, Mexico, the peso was 10 to 1; now it's 13.5 to 1. In England, the pound was worth $2. Now it's worth $1.50. The euro, the same thing; it was $1.50 - $1.60, now it's $1.20. So that's why it's had a big impact. But I'll turn that over to Tom.

I'll just give you one example. I mean, you might start the quarter and you have a pound sale so you reflect that sale as $2 of U.S. dollars. If you collect that pound sale during the quarter and the value at the point is $1.60, the $0.40 difference, that loss goes to SG&A because it's a collection of a receivable at a different value. For the receivables that you don't collect, you have to restate them at the quarter end value and our quarter end value was about $1.50 on the pound. It had a dramatic change during the quarter between August and November. So we had to restate our monetary assets and liabilities and, as a result of restating those, we had a write down of value in those things. And that cost goes to SG&A. And as Gerry said, I mean, the vast majority of our cost of goods are priced in U.S. dollars, so we don't get any change in our cost of good sold when the currencies change.

So with a strengthening dollar and increasing international sales, that would impact you, and on a weak-ending dollar and strengthening international sales, it would help you. Would I be correct in that?

Yes, sir.

Going to the balance sheet and the strong cash position and the fact that you purchased 93,000 shares at $14.78, current value of the stock $13.59, would you be inclined to be looking at your own stock rather than other acquisitions going forward?

As I mention on all the conference calls, yes, we're certainly interested in the Helen of Troy stock at this price. We believe that it's low. Our market cap is certainly below $400 million. Over a year ago or so it was over $1 billion, so it's way down in market cap. We believe that the OXO division that we own is worth more than the market cap of Helen of Troy. So, yes, definitely the stock looks very, very good to us to purchase. But also we're looking at acquisitions. We still haven't given up on acquisitions. We're looking at a lot of different companies, and we'll see what goes with that.

Wouldn't there be a significant amount of opportunities in the economic environment we're looking at right now?

And the answer is yes but, you know, making the deal and wanting the company are two different things. But the answer is yes, we have more opportunities than we've had lately.

(Operator Instructions) And gentlemen, there are no further questions at this time. I'll turn the conference back over to Gerald Rubin to conclude.

Well, I wanted to thank everybody for participating in our third quarter conference call. Our next conference call will be our fourth quarter and year end which will be, I believe, in May. So thank you all for participating and looking forward to a good quarter. Thank you again.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 8882031112, with replay passcode 4379294. This concludes our conference for today. Thank you for participating and have a nice day. All parties may disconnect at this time.