Consumer products company Helen of Troy (HELE) reported strong results for the first quarter of its 2014 fiscal year Tuesday evening. Revenue increased 1.4% year-over-year to $304.5 million, exceeding consensus estimates. Earnings per share advanced at a greater clip, growing 11% year-over-year to $0.82 per share on a non-GAAP basis, easily exceeding consensus expectations. Helen of Troy is one of the few names in the households products arena that trades at a discount to our fair value estimate, and the firm recently scored a rare 9 on the Valuentum Buying Index.
On the cost side of the equation, Helen of Troy surrendered to a competitive retail environment, as gross margins declined 90 basis points year-over-year to 39.5% as a result of more promotional activity. Management noted that the current gross margin run-rate should hold strong for the rest of the year, revealing that the competitive environment shouldn't escalate too much from current levels. SG&A declined 130 basis points year-over-year to 28.7% of sales as the firm received a nice boost from easy comparisons during the same period a year ago. We think the company will also benefit from its new Mississippi distribution center, which should help lower operating expenses.
Looking ahead, the company continues to target strategic acquisitions that it can integrate into existing operations to generate shareholder value. With manageable financial leverage, the company has plenty of room to take on additional debt to make selective acquisitions, and we'd be fans of such activity if the deals are value-creative by our projections. Helen of Troy offered solid guidance for its fiscal year 2014, forecasting revenue to come in the range of $1.29-$1.32 billion and earnings per share of $3.50-$3.60. The midpoints of these ranges compare favorably to consensus estimates that called for earnings per share of $3.53 on revenue of $1.3 billion during the period.
Given the price momentum in the shares of peers such as Johnson & Johnson (JNJ) and Kimberly-Clark (KMB), it seems like a bit of a surprise that the company trades at such a discount on a relative basis (with respect to its price-to-earnings ratio and price-earnings-to-growth-PEG-ratios). However, we think consumer staples investors want dividends (which Helen of Troy doesn't offer), leaving the firm a relatively undervalued (and unloved) stock. This may spell opportunity, however, and we continue to like the company's strong Valuentum Buying Index score, solid business model, and attractive valuation (both on a discounted cash flow-DCF-and relative value basis).
Additional disclosure: JNJ is included in our Best Ideas portfolio.