This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contains a number of forward-looking statements, all of
which are based on current expectations. Actual results may differ materially
due to a number of factors, including those discussed in Part I, Item 3 of this
report, "Quantitative and Qualitative Disclosures about Market Risk" and
"Information Regarding Forward-Looking Statements" in this report and "Risk
Factors" in the Company's most recent annual report on Form 10-K for the fiscal
year ended February 29, 2020 ("Form 10-K") and its other filings with the
Securities and Exchange Commission (the "SEC"). This discussion should be read
in conjunction with our condensed consolidated financial statements included
under Part I, Item 1 of this report. When used in this MD&A, unless otherwise
indicated or the context suggests otherwise, references to "the Company", "our
Company", "Helen of Troy", "we", "us", or "our" refer to Helen of Troy Limited
and its subsidiaries. Throughout this MD&A, we refer to our Leadership Brands,
which are brands that have number-one and number-two positions in their
respective categories and consist of the OXO, Honeywell, Braun, PUR, Hydro
Flask, Vicks, Hot Tools and Drybar brands.
This MD&A, including the tables under the headings "Operating income, operating
margin, adjusted operating income (non-GAAP) and adjusted operating margin
(non-GAAP) by segment" and "Net Income, diluted EPS, adjusted income (non-GAAP),
and adjusted diluted EPS (non-GAAP)," respectively, reports operating income,
operating margin, net income and diluted earnings per share ("EPS") without the
impact of non-cash asset impairment charges, acquisition-related expenses,
restructuring charges, tax reform, amortization of intangible assets, and
non-cash share-based compensation for the periods presented, as applicable.
These measures may be considered non-GAAP financial information as set forth in
SEC Regulation G, Rule 100. The tables reconcile these measures to their
corresponding GAAP-based measures presented in our condensed consolidated
statements of income. We believe that adjusted operating income, adjusted
operating margin, adjusted income, and adjusted diluted EPS provide useful
information to management and investors regarding financial and business trends
relating to our financial condition and results of operations. We believe that
these non-GAAP financial measures, in combination with our financial results
calculated in accordance with GAAP, provide investors with additional
perspective regarding the impact of such charges/benefits on applicable income,
margin and earnings per share measures. We also believe that these non-GAAP
measures facilitate a more direct comparison of our performance to our
competitors. We further believe that including the excluded charges/benefits
would not accurately reflect the underlying performance of our continuing
operations for the period in which the charges/benefits are incurred, even
though such charges/benefits may be incurred and reflected in our GAAP financial
results in the near future. The material limitation associated with the use of
the non-GAAP financial measures is that the non-GAAP measures do not reflect the
full economic impact of our activities. Our adjusted operating income, adjusted
operating margin, adjusted income, and adjusted diluted EPS are not prepared in
accordance with GAAP, are not an alternative to GAAP financial information and
may be calculated differently than non-GAAP financial information disclosed by
other companies. Accordingly, undue reliance should not be placed on non-GAAP
information. These measures are discussed further and reconciled to their
applicable GAAP based measures contained in this MD&A beginning on page 40.
There were no material changes to the key financial measures discussed in our
annual report on Form 10-K for the period ending
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OVERVIEW
We incorporated as Helen of Troy Corporation in Texas in 1968 and were
reorganized as Helen of Troy Limited in Bermuda in 1994. We are a leading global
consumer products company offering creative products and solutions for our
customers through a diversified portfolio of well-recognized and widely-trusted
brands. We have built leading market positions through new product innovation,
product quality and competitive pricing. We currently operate in three segments
consisting of Housewares, Health & Home, and Beauty.
In fiscal 2015, we launched a five-year transformational strategy designed to
improve the performance of our business segments and strengthen our shared
service capabilities. Fiscal 2019 marked the completion of Phase I of our
multi-year transformation strategy, which delivered performance across a wide
range of measures. We improved organic sales growth by focusing on our
Leadership Brands, made strategic acquisitions, became a more efficient
operating company with strong global shared services, upgraded our organization
and culture, improved inventory turns and return on invested capital, and
returned capital to shareholders.
Fiscal 2020 began Phase II of our transformation, which is designed to drive the
next five years of progress. The long-term objectives of Phase II include
improved organic sales growth, continued margin expansion, and strategic and
effective capital deployment. We expect Phase II will include continued
investment in our Leadership Brands, with a focus on growing them through
consumer-centric innovation, expanding them more aggressively outside the United
States , and adding new brands through acquisition. We anticipate building
further shared service capability and operating efficiency, as well as
attracting, retaining, unifying and training the best people.
In fiscal 2018, we announced a restructuring plan (referred to as "Project
Refuel") intended to enhance the performance primarily in the Beauty and former
Nutritional Supplements segments. Project Refuel includes charges for a
reduction-in-force and the elimination of certain contracts. During the first
quarter of fiscal 2019, we expanded Project Refuel to include the realignment
and streamlining of our supply chain structure. We are targeting total
annualized profit improvements of approximately $9.0 million to $11.0 million
over the duration of the plan.
On January 23, 2020 , we completed the acquisition of Drybar Products LLC
("Drybar Products"), for approximately $255.9 million in cash, subject to
certain customary closing adjustments. Drybar is an innovative, trend-setting
prestige hair care and styling brand in the multi-billion-dollar beauty
industry. As part of the transaction, we granted a worldwide license to Drybar
Holdings LLC , the owner and long-time operator of Drybar blowout salons, to use
the Drybar trademark in their continued operation of Drybar salons. The salons
will exclusively use, promote, and sell Drybar products globally.
Consistent with our strategy of focusing resources on our Leadership Brands,
during the fourth quarter of fiscal 2020, we committed to a plan to divest
certain assets within our mass channel personal care business ("Personal Care").
The assets to be disposed of include intangible assets, inventory and fixed
assets relating to our mass channel liquids, powder and aerosol products under
brands such as Pert, Brut, Sure and Infusium. We expect the divestiture to occur
within fiscal 2021. Accordingly, we have classified the identified assets of the
disposal group as held for sale.
On March 13, 2020 , we entered into an amendment to our Credit Agreement with
Bank of America, N.A ., as administrative agent, and other lenders (as amended,
the "Credit Agreement"). The amendment extended the maturity of the commitment
under the Credit Agreement from December 7, 2021 to March 13, 2025 . Further, the
amendment increased the unsecured revolving commitment from $1.0 billion to
$1.25 billion . The amount of the accordion was increased from $200 million to
$300 million . The accordion permits the Company to request to increase its
borrowing capacity, not to exceed the
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$300 million commitment in the aggregate, provided certain conditions are met,
including lender approval. Following the amendment, borrowings under the Credit
Agreement bear interest at either the base rate or LIBOR, plus a margin based on
the Net Leverage Ratio (as defined in the Credit Agreement) of 0% to 1.0% and
1.0% to 2.0%, respectively, for base rate and LIBOR borrowings. See Note 13 to
the accompanying condensed consolidated financial statements for additional
information.
Subsequent to the end of the third quarter, on December 22, 2020 , we entered
into an amended and extended Trademark License Agreement with Revlon to license
Revlon's trademark for hair care appliances and tools (the "Revlon License").
The Revlon License grants us an exclusive, global, fully paid-up license to use
the licensed trademark to manufacture, sell and distribute licensed merchandise
in accordance with the terms of the agreement. The Revlon License has an initial
term of 40 years, which will automatically renew at the end of the initial term
for three consecutive additional 20-year periods unless we give notice of
non-renewal. The Revlon License amends and restates the existing Revlon
trademark licensing agreements entirely, and eliminates ongoing royalties we
have historically paid and recognized as expense within SG&A in accordance with
such agreements. In exchange for this exclusive global license, we paid a
one-time, up-front license fee of $72.5 million , which will be recorded as an
intangible asset at cost and amortized on a straight-line basis over a useful
life of 40 years, representing the initial term. As a result of the Revlon
License, we are no longer obligated to pay royalties to Revlon, and thus will
not recognize royalty expense after December 22, 2020 , the effective date of the
Revlon License.
Significant Trends Impacting the Business
Potential Impact of COVID-19 InMarch 2020 , theWorld Health Organization declared the outbreak of a novel coronavirus ("COVID-19") to be a pandemic. COVID-19 continues to spread throughoutthe United States and the world, with the continued potential for catastrophic impact. The effects of the COVID-19 pandemic have had an unfavorable impact on certain parts of our business. The impact includes the effect of temporary closures of certain customer stores, or limited hours of operation, which has resulted in materially lower store traffic. The economic impact of historic unemployment and consumer uncertainty has also resulted in reduced overall demand for our more discretionary product lines. COVID-19 has also disrupted certain parts of our supply chain, which in certain cases has limited our ability to fulfill demand. COVID-19 has favorably impacted the demand for our product lines that are more defensive, meet certain healthcare or healthy living needs, or meet the needs of consumers that are spending more time at home as a result of the pandemic. COVID-19 has also favorably impacted our online channel in a meaningful way, as brick and mortar shopping options have been limited or considered unsafe by consumers. Although the favorable impacts of COVID-19 outweighed the unfavorable impacts for the nine month period endedNovember 30, 2020 , this situation continues to change rapidly, and additional impacts or more pronounced adverse impacts may arise that we are not currently aware of today. Accordingly, our liquidity and financial results could be impacted in ways that we are not able to predict today. These future developments are outside of our control, are highly uncertain and cannot be predicted. If the COVID-19 impact or resulting economic downturn is prolonged, then it can further increase the difficulty of planning for operations. These and other potential impacts of the current public health crisis could therefore materially and adversely affect our business, financial condition, cash flows and results of operations. During the first quarter of fiscal 2021, as part of a comprehensive approach to preserve our cash flow and adjust our cost structure to align to lower anticipated revenue related to the business disruption and uncertainty of COVID-19, we implemented a number of temporary precautionary measures. These measures included the following: 29 -------------------------------------------------------------------------------- Table of Contents •a graduated salary reduction for all associates, including named executive officers and the other members of the Company's executive leadership team; •a reduction in the cash compensation of the Company's Board of Directors; •suspension of merit increases, promotions and new associate hiring until further notice; •the furlough of associates in specific areas directly tied to sales volume, with assistance to maintain health insurance coverage, as well as a reduction of external temporary labor and reduced work hours; •reduction or deferral of marketing expense, while continuing to support brands with strong consumer demand and to keep brands top of mind with the consumer; •limited reduction of investment in new product development and launches, in anticipation of more normalized economic activity; •elimination of travel expense in the short term, with a significant reduction planned for the second half of fiscal 2021; and •reduction of consulting fees and capital expenditures for projects that are not critical. During the second quarter of fiscal 2021, we reversed a number of these temporary measures including a restoration of all wages, salaries, and director compensation to pre-COVID-19 levels. We also increased levels of investments in marketing activities, new product development and launches and capital expenditures. In the third quarter of fiscal 2021, we continued to increase the amount of these investments, and we expect to continue to further increase our investments in these areas during the fourth quarter of fiscal 2021. These investments are intended to continue progressing our Phase II transformation plan and the longer-term opportunities we see to further grow our business. In addition, during the third quarter of fiscal 2021, we reinstituted merit increases, promotions and new associate hiring. Due to the evolving COVID-19 pandemic and related consumer demand for certain of our products, trends are emerging that may impact our ability to fulfill some orders on a timely basis or make marketing investments with an acceptable return. We continue to see very strong demand trends in many of our product categories. In the second quarter of fiscal 2021, demand continued to outpace even recently increased supply capacity with respect to thermometry, air filtration, water filtration and various products within Housewares, which in some cases resulted in out of stocks. Demand continued to outpace our increased supply capacity during the third quarter of fiscal 2021, with respect to thermometry and various products within Housewares, which in some cases resulted in out of stocks. Additionally, surges in demand and shifts in shopping patterns related to COVID-19 have strained theU.S. freight network, which is resulting in carrier-imposed capacity restrictions and carrier delays. The demand surge for the OXO brand, in combination with carrier delays, caused order flow to outpace shipping capacity in our distribution center at certain times during the second and third quarters of fiscal 2021. These factors may impact our ability to fulfill some orders on a timely basis. These trends can also limit our ability to make marketing expenditures with an adequate return on investment. In certain categories, where macro-trends like COVID-19 are driving demand significantly higher than historical levels or in situations where supply or distribution is capacity constrained, we believe that driving additional demand through incremental marketing activities could compound potential shipment delays or out of stocks. In these situations, currently planned marketing investments designed to drive incremental short-term demand would not be made.
These trends and potential impacts could therefore materially and adversely affect our business, financial condition, cash flows and results of operations.
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Potential Impact of Tariffs
During fiscal 2019 and 2020, the Office of the U.S. Trade Representative
("USTR") imposed, and in certain cases subsequently reduced or removed,
additional tariffs on products imported from China . We purchase a high
concentration of our products from unaffiliated manufacturers located in China .
This concentration exposes us to risks associated with doing business globally,
including changes in tariffs. Any alteration of trade agreements and terms
between China and the United States , including limiting trade with China ,
imposing additional tariffs on imports from China and potentially imposing other
restrictions on exports from China to the United States may result in further
and/or higher tariffs or retaliatory trade measures by China . Furthermore, we
have been somewhat successful in obtaining tariff exclusions from the USTR on
certain products that we import. These exclusions generally expire after a
certain period of time and must be re-approved by the USTR, otherwise higher
tariffs will be assessed on our products upon expiration of the exclusions. All
of these factors could have a material adverse effect on our business and
results of operations.
Foreign Currency Exchange Rate Fluctuations
Due to the nature of our operations, we have exposure to the impact of
fluctuations in exchange rates from transactions that are denominated in a
currency other than our reporting currency (the U.S. Dollar). The most
significant currencies affecting our operating results are the British Pound,
Euro, Canadian Dollar, and Mexican Peso.
For the three months ended November 30, 2020 , changes in foreign currency
exchange rates had a favorable year-over-year impact on consolidated U.S. Dollar
reported net sales revenue of approximately $1.7 million , or 0.4%, compared to
an unfavorable impact of $2.3 million , or 0.5% for the same period last year.
For the nine months ended November 30, 2020 , changes in foreign currency
exchange rates had an unfavorable year-over-year impact on consolidated U.S.
dollar reported net sales revenue of approximately $3.2 million , or 0.3%,
compared to an unfavorable impact of $6.8 million , or 0.6% for the same period
last year.
Consumer Spending and Changes in Shopping Preferences
Our business depends upon discretionary consumer demand for most of our products
and primarily operates within mature and highly developed consumer markets. The
principal driver of our operating performance is the strength of the U.S. retail
economy. Approximately 80% of our net sales were from U.S. shipments for the
three months ended November 30, 2020 and 2019. For both the nine month periods
ended November 30, 2020 and 2019, U.S. shipments were approximately 79% of our
net sales.
Our concentration of sales reflects the evolution of consumer shopping
preferences to online or multichannel shopping experiences. For the three and
nine month periods ended November 30, 2020 , our net sales to retail customers
fulfilling end-consumer online orders and online sales directly to consumers
comprised approximately 24% and 25%, respectively, of our total consolidated net
sales revenue, and grew approximately 34% and 33%, respectively, over the same
periods last year.
For both the three and nine month periods ended November 30, 2019 , our net sales
to retail customers fulfilling end-consumer online orders and online sales
directly to consumers comprised approximately 24% of our total consolidated net
sales revenue, and grew approximately 30% and 28%, respectively, over the same
periods last year.
Variability of the Cough/Cold/Flu Season
Sales in several of our Health & Home segment categories are highly correlated
to the severity of winter weather and cough/cold/flu incidence. In the U.S. , the
cough/cold/flu season historically runs from November through March, with peak
activity normally in January to March. For the 2019-2020 season, cough/cold/flu
incidence was slightly higher than the 2018-2019 season, which was a below
average season.
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RESULTS OF OPERATIONS
The following tables provide selected operating data, in
Three Months Ended November 30, % of Sales Revenue, net
(in thousands) 2020 (1) 2019 $ Change % Change 2020 2019
Sales revenue by segment, net
Housewares $ 222,400 $ 183,211 $ 39,189 21.4 % 34.9 % 38.6 %
Health & Home 250,158 185,810 64,348 34.6 % 39.2 % 39.1 %
Beauty 165,179 105,716 59,463 56.2 % 25.9 % 22.3 %
Total sales revenue, net 637,737 474,737 163,000 34.3 % 100.0 % 100.0 %
Cost of goods sold 350,410 264,764 85,646 32.3 % 54.9 % 55.8 %
Gross profit 287,327 209,973 77,354 36.8 % 45.1 % 44.2 %
Selling, general and administrative expense
("SG&A") 186,630 130,692 55,938 42.8 % 29.3 % 27.5 %
Restructuring charges (12) 12 (24) * - % - %
Operating income 100,709 79,269 21,440 27.0 % 15.8 % 16.7 %
Non-operating income, net 93 92 1 1.1 % - % - %
Interest expense (2,926) (2,767) (159) 5.7 % (0.5) % (0.6) %
Income before income tax 97,876 76,594 21,282 27.8 % 15.3 % 16.1 %
Income tax expense 13,721 7,895 5,826 73.8 % 2.2 % 1.7 %
Net income $ 84,155 $ 68,699 $ 15,456 22.5 % 13.2 % 14.5 %
Nine Months Ended November 30, % of Sales Revenue, net
(in thousands) 2020 (1) 2019 $ Change % Change 2020 2019
Sales revenue by segment, net
Housewares $ 564,891 $ 496,017 $ 68,874 13.9 % 35.6 % 39.2 %
Health & Home 661,568 499,543 162,025 32.4 % 41.6 % 39.5 %
Beauty 362,965 269,507 93,458 34.7 % 22.8 % 21.3 %
Total sales revenue, net 1,589,424 1,265,067 324,357 25.6 % 100.0 % 100.0 %
Cost of goods sold 892,460 723,216 169,244 23.4 % 56.1 % 57.2 %
Gross profit 696,964 541,851 155,113 28.6 % 43.9 % 42.8 %
SG&A 439,646 359,794 79,852 22.2 % 27.7 % 28.4 %
Restructuring charges 355 1,061 (706) (66.5) % - % 0.1 %
Operating income 256,963 180,996 75,967 42.0 % 16.2 % 14.3 %
Non-operating income, net 440 313 127 40.6 % - % - %
Interest expense (9,568) (9,291) (277) 3.0 % (0.6) % (0.7) %
Income before income tax 247,835 172,018 75,817 44.1 % 15.6 % 13.6 %
Income tax expense 16,061 16,530 (469) (2.8) % 1.0 % 1.3 %
Net income $ 231,774 $ 155,488 $ 76,286 49.1 % 14.6 % 12.3 %
(1)The three and nine month periods ended November 30, 2020 include three and
nine months of operating results for Drybar Products, respectively, which was
acquired on January 23, 2020 , with no comparable results in the same periods
last year. For additional information regarding the Drybar Products acquisition,
see Note 7 to the accompanying condensed consolidated financial statements.
* Calculation is not meaningful.
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Third Quarter Fiscal 2021 Financial Results
•Consolidated net sales revenue increased 34.3%, or $163.0 million , to $637.7
million for the three months ended November 30, 2020 , compared to $474.7 million
for the same period last year.
•Consolidated operating income increased 27.0%, or $21.4 million , to $100.7
million for the three months ended November 30, 2020 , compared to $79.3 million
for the same period last year. Consolidated operating margin decreased 0.9
percentage points to 15.8% of consolidated net sales revenue for the three
months ended November 30, 2020 , compared to 16.7% for the same period last year.
•Consolidated adjusted operating income increased 24.0%, or $21.6 million , to
$111.9 million for the three months ended November 30, 2020 , compared to $90.3
million for the same period last year. Consolidated adjusted operating margin
decreased 1.4 percentage points to 17.6% of consolidated net sales revenue for
the three months ended November 30, 2020 , compared to 19.0% for the same period
last year.
•Net income increased 22.5%, or $15.5 million , to $84.2 million for the three
months ended November 30, 2020 , compared to $68.7 million for the same period
last year. Diluted EPS increased 23.2% to $3.34 for the three months ended
November 30, 2020 , compared to $2.71 for the same period last year.
•Adjusted income increased 19.8%, or $15.7 million , to $94.8 million for the
three months ended November 30, 2020 , compared to $79.1 million for the same
period last year. Adjusted diluted EPS increased 20.5% to $3.76 for the three
months ended November 30, 2020 , compared to $3.12 for the same period last year.
Year-To-Date Fiscal 2021 Financial Results
•Consolidated net sales revenue increased 25.6%, or
•Consolidated operating income increased 42.0%, or$76.0 million , to$257.0 million for the nine months endedNovember 30, 2020 , compared to$181.0 million for the same period last year. Consolidated operating margin increased 1.9 percentage points to 16.2% of consolidated net sales revenue for the nine months endedNovember 30, 2020 , compared to 14.3% for the same period last year. •Consolidated adjusted operating income increased 35.3%, or$76.1 million , to$291.5 million for the nine months endedNovember 30, 2020 , compared to$215.4 million for the same period last year. Consolidated adjusted operating margin increased 1.3 percentage points to 18.3% of consolidated net sales revenue for the nine months endedNovember 30, 2020 , compared to 17.0% for the same period last year. •Net income increased 49.1%, or$76.3 million , to$231.8 million for the nine months endedNovember 30, 2020 , compared to$155.5 million for the same period last year. Diluted EPS increased 48.6% to$9.14 for the nine months endedNovember 30, 2020 , compared to$6.15 for the same period last year. 33
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Table of Contents •Adjusted income increased 35.8%, or$67.1 million , to$254.9 million for the nine months endedNovember 30, 2020 , compared to$187.8 million for the same period last year. Adjusted diluted EPS increased 35.4% to$10.05 for the nine months endedNovember 30, 2020 , compared to$7.42 for the same period last year.
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