Can Growth Initiatives Help Spectrum Brands Pare Hurdles?

Spectrum Brands Holdings, Inc. SPB is moving down the charts, thanks to higher operating and distribution costs that are weighing on the company’s performance. Despite registering a top- and bottom-line beat in third-quarter fiscal 2019, the company’s sales fell year over year due to decline across most of its segments and adverse foreign currency translations.

Consequently, shares of the company have lost 16.9% in the past three months compared with the industry’s 14.4% decline.

Nevertheless, this Zacks Rank #3 (Hold) company stands to gain from its strategic initiatives including mergers, acquisitions and divestitures, and brand strength. Management has successfully implemented value-creating initiatives to accelerate transition toward a stronger and focused consumer products company. Let’s take a closer look.

Factors Hurting the Stock

Spectrum Brands grapples with higher costs along with tariffs and input cost inflation for quite some time. In the fiscal third quarter, the operating income declined 13.1%, and as a percentage of sales, the metric contracted 130 basis points (bps) from the year-ago period. Notably, increased distribution costs and restructuring charges as well as the absence of depreciation and amortization costs from Home & Personal Care in the year-ago quarter resulted in the downturn.

Moreover, adjusted EBITDA dipped nearly 2.7% in the quarter due to a decline in the metric across the company’s Hardware & Home Improvement, Home & Personal Care, and Home & Garden segments. Spectrum Brands’ adjusted EBITDA margin contracted 40 bps in the fiscal third quarter. Prior to this, adjusted EBITDA margins contracted 40 bps and 120 bps in the second and first quarter of fiscal 2019, respectively, due to higher costs.

Furthermore, lower sales in U.S. residential security and builders’ hardware as well as a decline in personal care and small appliances revenues are weighing on the company’s total sales. Lower sales in household insect and outdoor controls also affected Spectrum Brands’ performance. For fiscal 2019, net sales are now expected to remain flat year over year compared to the earlier projection of witnessing an improvement.

Additionally, Spectrum Brands remains exposed to major foreign currency risks, which are likely to persist throughout the fiscal year. In fiscal 2019, foreign currency translations are expected to hurt sales by roughly 150 bps depending on current rates.

Strategies to Provide Some Respite

We note that Spectrum Brands has conducted a thorough analysis of its global operating model to capture growth opportunities. In third-quarter fiscal 2019, the company moved from analysis into detailed planning and started the initial execution of its Global Productivity Improvement Plan. This plan is likely to materially and permanently improve the operating efficiency and effectiveness of the company, enabling growth investments and consumer insights, research and development, and marketing. Encouragingly, it invested roughly $20 million in the first phase of the plan. Further, the company executed nearly $35 million of annualized sourcing savings, most of which will be achieved in fiscal 2020.

Furthermore, the company announced a five-year partnership with Manchester United plc, following which its Remington personal care brand will be the Manchester Football Club’s foremost official Electrical Styling Partner. This deal is expected to enable Spectrum Brands reinforce strength in the Home & Personal Care segment besides focusing on product innovations and marketing efforts.

In January 2019, it completed the divestitures of its Global Auto Care business as well as Global Battery and Lighting Businesses to Energizer Holdings, Inc. ENR for total gross sale proceeds of roughly $2.9 billion and 5.3 million shares of the buyer’s common stock. Notably, management remains on track to execute actions like debt reduction to materially improve the capital structure in fiscal 2019. Additionally, the company is set to concentrate on the development of its key business segments.

Moving ahead, we expect Spectrum Brands’ growth endeavors to cushion the stock, despite the aforementioned hurdles.

Key Picks in the Consumer Discretionary Space

Funko, Inc. FNKO has an impressive long-term earnings growth rate of 18.8% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Crocs, Inc. CROX, also a Zacks Rank #1 stock, has a long-term earnings growth rate of 15%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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