Spectrum Brands Holdings, Inc. SPB reported robust third-quarter fiscal 2018 results, wherein both the top and bottom line outpaced the estimates and rose year over year. As a result, management updated its guidance for fiscal 2018.
Quarterly adjusted earnings from continuing operations of $1.76 per share grew 23.9% year over year and outpaced the Zacks Consensus Estimate of $1.57. The year-over-year improvement was backed by gross margin expansion and lower U.S. corporate tax rate.
In the past three months, this Zacks Rank #3 (Hold) stock has gained 11.4%, underperforming the industry
's rally of 23.7%.
Spectrum Brands' net sales grew 9.6% year over year to $945.5 million and came ahead of the Zacks Consensus Estimate of $901 million. Excluding the impact of $4.9 million from foreign currency translation tailwinds and $14.5 million from acquisition sales, organic net sales rose 7.3% year over year in the quarter under review.
The company's gross profit increased 10.7% year over year to $354.6 million, with the gross margin expanding 40 basis points (bps) to 37.5%. This upside was mainly driven by lower supply chain restructuring costs.
Further, operating income surged 25.4% to $126.3 million, with margin expansion of 170 bps to 13.4%. This improvement can be attributed to higher gross margin, somewhat offset by increased operating costs.
Spectrum Brands Holdings Inc. Price, Consensus and EPS Surprise
Spectrum Brands Holdings Inc. Price, Consensus and EPS Surprise | Spectrum Brands Holdings Inc. Quote
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 3.6% to $206.4 million in the fiscal third quarter. However, adjusted EBITDA margin contracted 130 bps to 21.8% on higher operating and distribution costs as well as input cost inflation.
In January 2018, Spectrum Brands announced that it has been exploring strategic alternatives for Global Batteries & Appliances (GBA) businesses and plans to divest these assets in the current year. Also, the company has classified this segment as held for sale and reported it as discontinued operations effective first-quarter fiscal 2018.
Currently, the company operates under four segments - Hardware & Home Improvement (HHI), Global Pet Supplies (PET), Home and Garden (H&G) and Global Auto Care (GAC).
Spectrum Brands' Hardware & Home Improvement segment's sales rose 14.7% to $372.4 million driven by continued robust demand in residential security as well as plumbing in the United States and Canada. Also, decline in the customer order backlog at the Kansas distribution center aided top-line growth. Excluding the foreign currency tailwinds, the segment's organic sales also edged up 14.3% on a year-over-year basis. Adjusted EBITDA at the segment grew 18.8% to $73.9 million as well.
The company's Global Pet Supplies segment's sales were up 2.5% year over year to $194.7 million, courtesy of gains from the PetMatrix and GloFish buyouts, somewhat offset by lower European dog and cat food sales. Excluding the favorable currency fluctuations impacts and acquisition sales, organic sales at the segment dropped 6.7%. Also, the segment's adjusted EBITDA fell 3.3% to $34.9 million.
The Home & Garden segment's sales increased 5.6% year over year to $203.2 million backed by solid growth in outdoor and household control product category sales. However, the segment's adjusted EBITDA declined 4.2% to $57 million.
The Global Auto Care segment's sales rose 12.5% to $175.2 million driven by robust growth in refrigerant revenues and higher chemical sales. Excluding favorable foreign currency impacts, organic net sales grew 12%. Nonetheless, the segment's adjusted EBITDA slipped 1.2% to $50.1 million.
Spectrum Brands ended the quarter with cash and cash equivalents of $814.6 million and approximately $234 million available under the $800 million Cash Flow Revolver. Total debt outstanding at the end of the third quarter of fiscal 2018 was nearly $5,412 million.
Recently, Spectrum Brands completed its merger with HRG Group, Inc. - its former largest shareholder. The merged company is named Spectrum Brands Holdings Inc., trading under the ticker symbol "SPB," thus winding down the HRG Group. Approved by both the companies' shareholders, the merger deal made Spectrum Brands an independent company, thus enhancing its shareholder base and governance structure. As a result, it will create significant value for its shareholders and drive growth across the business.
Furthermore, the company is expected to close the sale of its Global Battery and Lighting business to Energizer Holdings, Inc. ENR worth $2 billion in cash by 2018 end. Management plans to redirect the capital invested in the Global Batteries & Appliances business toward development of its remaining four businesses, including Hardware & Home Improvement, Global Auto Care, Global Pet Supplies and Home & Garden. Moreover, Spectrum Brands will use the divestiture proceeds for debt reduction, reinvestment in core businesses both organically and via strategic buyouts, and share buybacks.
Fiscal 2018 Guidance
Following the solid quarterly results, Spectrum Brands updated its outlook for fiscal 2018. Net sales from continuing operations for the fiscal are projected to improve more than category rates for most categories and modest gains from expected foreign exchange rates.
For fiscal 2018, the company envisions adjusted EBITDA from continuing operations to be in the range of $600-$617 million compared with $639 million in fiscal 2017. Also, adjusted EBITDA from discontinued operations is anticipated in the band of $265-$275 million, down from $300-$310 million guided earlier.
Meanwhile, adjusted free cash flow for fiscal 2018 is still expected to be roughly in the $485-$505 million band compared with $587 million in fiscal 2017. Capital expenditures are expected in the range of $100-$110 million, down from $110-$120 million guided earlier.
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