Helen of Troy Limited (NASDAQ:HELE) is one of the most intriguing companies I have come across. I was caught by the name, and first covered it, last summer. As fellow fans of Greek mythology will recall, Helen of Troy was the daughter of Zeus and Leda, and was considered the most beautiful woman in the world. Interestingly, Helen of Troy Limited is a beauty company that faces little direct competition.
Helen of Troy designs, develops, imports, markets, and distributes a portfolio of personal care, housewares, and healthcare/home environment products. Its Personal Care/Beauty segment offers curling irons, straightening irons, hand-held dryers, facial and skin care appliances as well as foot care appliances, handheld and lighted mirrors, hair brushes, styling products, conditioners, shampoos, and fragrances. It also has a Housewares segment and a Healthcare/Home Environment segment as well as offers nutritional supplements.
That said, the stock has been anything but pretty, as it is trading flat from where I recommended it after pulling back heavily in recent weeks. However, there may be a catalyst once again in the just reported earnings. Is this an opportunity to initiate a new position?
There is no doubt that there is definitely a strong market for its products, but does this company deserve a place in your portfolio? Well, its recent performance has been strong, especially in the just reported quarter. Net sales revenue grew to $445.5 million up $9.8 million or 2.3% from the $435.7 million in fiscal Q3 2015. Revenues beat analysts' estimates by $4.89 million. It is important to note however that foreign currency hit sales for about $8.8 million. Gross profit margin unfortunately dipped to 41.0% compared to 41.6% for the same period last year. This is attributed to the way currency issues impacted the name.
I was unhappy to see that expenses were up again. While I realize you have to 'spend money to make money,' expenses as a percentage of sales increased by 180 basis points. Expenses were 28.5% of net sales compared to just 26.7% of net sales for the same period last year. This was a bit surprising but much of the increase was due to CEO transition costs which moved things by 150 basis points. That said, operating income was down as well. It came in at $55.6 million. This is compared to operating income of $65.0 million in the same period last year.
While all of these metrics matter, and can move buyers and sellers, it ultimately comes down to earnings growth. The company delivered a bottom line beat by $0.14. That said, net income actually fell to $46.8 million, or $1.63 per fully diluted share. This compares to net income in Q3 2015 of $55.4 million, or $1.92 per fully diluted share. Adjusted income may have beat by $0.14, but it fell year-over-year as well. It came in at $59.2 million or $2.07 per share, versus $62.6 million or $2.17 per share. All in all, I was surprised by the year-over-year changes in these key metrics. But the words of Julien R. Mininberg, chief executive officer, put these results in perspective:
We are pleased with our third quarter performance, which we believe has us solidly on track to achieve our annual goals. Sales grew 2.3% despite a foreign currency drag of 2.0% and we made further progress toward our seven key strategic priorities that are guiding our multi-year transformation. We are seeing improved organic growth from our efforts to improve innovation, which led to strong growth in the Health & Home segment despite foreign currency exposure and the comparison to a strong performance in the third quarter last year. In our Beauty segment, we are seeing a favorable response to new product introductions and improved branding in appliances. Our Housewares segments growth included its first foray into kitchen electronics and metal bakeware. Nutritional Supplements saw a decline in the quarter, as it continues to shift emphasis from its direct mail and print newsletter subscription business to online and auto delivery. We are pleased to deliver adjusted diluted EPS of $2.07, overcoming foreign currency headwinds that have been greater than expected. Based on our performance to date and the continued progress we are making on our key initiatives, we are maintaining our full year outlook even as we have experienced a slow start to the cold and flu season, experience more significant foreign exchange pressures, and see considerable variability in the retail environment.
So where do we go from here? I really liked this name. But the growth catalysts just aren't there right now for me. The CEO said rather plainly, there are a number of challenges that the company faces and they think they can meet expectations. Im looking for more. I want confidence and expectations to be crushed. That is why I think the stock opened so high today and fell as the day went on. It just wasn't good enough. I am downgrading to a hold at this juncture.
Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "Follow." He also writes a lot of "breaking" articles, which are time-sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.