Despite headwinds like harsh weather and sluggish new
Fortune Brands Home & Security Inc.
) began 2014 with adjusted earnings per share (EPS) climbing 4.2%
on a year-over-year basis to 25 cents. However, adjusted earnings
came substantially below the Zacks Consensus Estimate of 32
cents. Adjusted net income for the quarter advanced 3.6% to $42.7
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On a GAAP basis, Fortune Brands' earnings soared 9.1% to 24 cents
per share. Also, reported net income increased by 9.4% to $40.8
Although net sales for the first quarter advanced 8.6% year over
year to $966.2 million, it fell short of Zacks Consensus Estimate
of $993 million. Excluding extreme winter conditions, total sales
would have escalated 13% year over year.
Fortune Brands' Kitchen & Bath Cabinetry, Plumbing &
Accessories and Advanced Material Windows & Door Systems are
collectively named the home product segment. The company
registered a 9.3% increase in the consolidated home product
segment sales, which came in at $850.8 million. Excluding the
impact of weather, home product sales would show a 14% jump.
Adjusted gross profit inched up 3.9% to $315.4 million, while
gross margin contracted 150 basis points (bps) to 32.6%.
Operating income before including any one-time items came in at
$65.1 million, up 4.3% from the year-ago comparable quarter, with
adjusted operating margin shriveling 30 bps to 6.7%.
Sales at the
Kitchen & Bath Cabinetry
segment ascended 19% to $410.9 million, on the back of solid
increases in dealer network coupled with robust remodel and
repair mix and volumes. The segment reported a 34% rise in
adjusted operating income, which came in at $20 million.
Plumbing & Accessories
segment sales remained flat year over year at $309.9 million,
supported by strength in China and the U.S. network. Adjusted
operating income for the segment climbed 1% to $55.4 million.
Advanced Material Windows & Door Systems
sales were up 5% to $130.0 million, as entry door sales witnessed
an 8% increase and window sales remained relatively flat. The
segment operating loss narrowed to $7.7 million from $7.9 million
Sales at the
Security & Storage
segment picked up 3% to $115.4 million, benefitting from a 4% and
2% rise in security sales and tool storage sales, respectively.
However, adjusted operating income slipped 2% to $12 million.
Fortune Brands ended the quarter with cash and cash equivalents
of $124.2 million, while long-term debt (excluding current
maturities) was $475.0 million. Shareholders' equity (excluding
non-controlling interests) at the quarter end was $2,637.2
During the reported quarter, the company made several investments
in designing, planning and implementing additional capacity in
the plumbing and cabinetry segments. The company aims at making
continuous investments in enhancing its incremental capacity in
order to facilitate sales growth of roughly $6 million in the
next 3 years.
Moreover, a day before the earnings release, the company also
increased its quarterly dividend by 20% to 12 cents a share.
Based on the assumption that U.S. home products market will grow
by 9-10% in 2014, the company forecasted sales to advance by
10-12 for the year %, as against 11-13% predicted earlier.
Further, since the first quarter was hit by bad weather, the
company updated its adjusted earnings guidance to a band of
$1.90-$1.99 for 2014, compared to previous projections of
$1.91-$2.01. Currently, the Zacks Consensus Estimate for 2014
stands at $1.97 per share, falling within the company's range.
Moreover, Fortune Brands is expected to generate free cash flow
of over $250 million in 2014, after excluding the impact of its
expected capital expenditures of roughly $130-$140 million.
This leading home and security products company believes that it
has built an impressive momentum in the last couple of years and
is well placed to boost profits in the future. Also, management
believes that after overcoming a harsh winter, the company is now
regaining pace as consumer traffic is improving and is likely to
deliver robust performance in the second half of the year.
Other Stocks to Consider
Fortune Brands currently holds a Zacks Rank #4 (Sell). Other
better-ranked stocks in the retail sector include
Bon-Ton Stores Inc.
Rite Aid Corporation
), both holding a Zacks Rank #1 (Strong Buy) and
Restoration Hardware Holdings, Inc.
), holding a Zacks Rank #2 (Buy).