Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Helen of Troy Ltd. (NASDAQ:HELE)

F2Q08 Earnings Call

October 10, 2007 11:00 am ET

Executives

Gerald Rubin - Chairman, President and CEO

Thomas Benson - Senior VP and CFO

Robert Spear - Senior VP and CIO

Analysts

Gary Giblen - Goldsmith and Harris

Kathleen Reed - Stanford Group

Bill Leach - Neuberger Berman

Mimi Noel - Sidoti and Company

John Harlow - Barrel Henley

Steve Freidman - Wachovia Securities

Matt Sirovich - Scopia Capital

Presentation

Operator

Good morning and welcome, ladies and gentlemen, to the Helen of Troy second quarter earnings conference call for fiscal 2008. (Operator Instructions)

Our speakers for this morning’s conference call are: Gerald Rubin, Chairman, CEO, and President; Thomas Benson, SVP and CFO; and Robert Spear, SVP and CIO.

I will now turn the conference over to Robert Spear. Please go ahead, sir.

Robert Spear

Good morning, everyone, and welcome to Helen of Troy’s second quarter earnings conference call for fiscal 2008. The agenda for this morning’s conference call will be as follows: We will review a brief forward-looking statement review, followed by Mr. Rubin, who will discuss our second quarter earnings release, and the related results of operations for Helen of Troy, followed by Tom Benson, who will discuss the financial review of our income statement and balance sheet for the quarter, and then finally we’ll open it up for questions and answers for those of you with any further questions.

Now the safe harbour statement. This conference call may contain certain forward-looking statements that are based on management’s current expectation with respect to future events or financial performance. A number of risks or uncertainties could cause actual results to differ materially from those historical or anticipated results. Generally the words ‘anticipate’, ‘believe’, ‘expect’, and other similar words identify forward-looking statements. The company cautions listeners to not place undue reliance on forward-looking statements. Forward-looking statements are subject to risk that could cause such statements to differ materially from actual results. Factors that could cause actual results to differ from those anticipated are described in the company’s Form 10Q, filed with the Securities and Exchange Commission for the year ended August 31, 2007, and then our other filings with the SEC.

Before I turn the conference call over to our chairman, Mr. Rubin, I would like to inform all interested parties that a copy of today’s earnings release has been posted to our website at www.hotus.com. The release can be accessed by selecting the investor relations tab on our homepage and then the news tab. I’ll now turn the conference over to Mr. Gerald Rubin, Chairman, CEO, and President of Helen of Troy.

Gerald Rubin

Thank you, Bob. Good morning, everybody. Helen of Troy today reported results for the second quarter ending August 31st, 2007. Second quarter sales increased 7.3% to a record $158 million, versus sales of $147 million in the same period of the prior year. Second quarter net earnings were $18.253 million, or 56 cents per fully diluted share, compared with $10.874 million, or 35 cents per fully diluted share, for the same period a year earlier; an increase in earnings per share of 60%.

Sales for the six months ending August 31st, 2007, increased 7.4% to $298 million versus $278 million for the previous years.

Net earnings for the first half of this year were $28.37 million, or 88 cents per diluted share, versus $17.553 million, or 56 cents per diluted share in the same period last year.

Over the past eight years, one of the major concerns from share holders has been the tax dispute that Helen of Troy has had with the Hong Kong Inland Revenue Department. I am pleased to report that we have settled this tax dispute for the fiscal years 1998 through 2005. This settlement increased fully diluted earnings per share by 24 cents for the quarter and year to date.

We are pleased that the sales increases we experienced in the first quarter continued into the second quarter. The initial sale through of our new product introductions at retail have positively impacted our sales for the second quarter, however our present retail environment is extremely challenging. Many of our retail customers are experiencing a slowing sales environment as we enter the critical fall in holiday sales season. We believe this disappointing consumer spending trend of the mass market channel is likely attributable to macro factors, including high gas prices, tightening credit markets, and the housing problems. Because of these factors we are adjusting our previous guidance for the fiscal year ending February 29, 2008. Sales are projected to be in the range of $660 m to $680 million versus our previous guidance of sales in the range of $680 m to $690 million. Net earnings are now projected to be in the range of $1.90 to $2.10 per fully diluted share, which includes 24 cents per fully diluted share represented by our tax settlement.

We believe that our company’s business fundamentals remain strong. Going forward, we plan to continue to execute our business plan by introducing new product offerings, increasing market share through channel expansion, and product innovation, and continuing our effort of increasing process efficiencies and reducing related expenses.

I’d now like to turn this conference call over to Tom Benson, our CFO, who will give you the financial highlights.

Thomas Benson

Thank you, Gerry, and good morning, everyone. We are pleased with our performance for the second quarter. Despite a challenging retail sales environment, sales growth was positive, gross profit margin improved 40 basis points over the first quarter, and selling general and administrative expenses as a percentage of sales continued to decrease year over year. We have also settled eight years of open tax disputes with the Hong Kong Inland Revenue Department. We are very pleased to have settled this long-standing dispute with the Hong Kong taxing authorities.

Second quarter net sales increased 7.3% year over year. Net sales for the second quarter of fiscal 2008 were $157.9 million compared to $147.2 million in the prior year quarter. This represents an increase of $10.8 million, which is a 7.3% increase.

Our second quarter operating income decreased by 6.9% in dollar terms year over year. Operating income in the second quarter fiscal 2008 was $15.5 million, which is 9.8% of sales, compared to $16.6 million, or 11.3% of sales, in the prior year. This represents a decrease of $1.1 million or 6.9%.

Second quarter net earnings increased 68% in dollar terms year over year. Net earnings for the second quarter of fiscal 2008 were $18.3 million, which is 11.6% of sales, compared to $10.9 million, or 7.4% of sales, in the prior year quarter. This represents an increase of $7.4 million or 67.9% increase.

Please note that we have a tax provision reversal in the quarter related to the Hong Kong tax settlement which provided a benefit of $7.9 million. Second quarter diluted earnings per share, including the 24 cents associated with this tax settlement, was 56 cents in the second quarter of fiscal 2008 compared to 35 cents in the second quarter of fiscal 2007. This is a 21 cent increase in diluted earnings per share, which is 60% increase.

Now I’ll provide a more detailed review of the various components of our financial performance.

Personal care segment. Our personal care segment includes the following product lines: appliances. Products in this group include hair dryers, curling irons, thermal brushes, hair straighteners, massagers, spa products, foot baths, and electric clippers and trimmers. Key brands in this category include Revlon, Vidal Sassoon, Bed Head, Gold ‘N Hot, Sunbeam, Dr. Scholl’s, Hot Tools, Wigo, and Health Amigo.

Grooming, skin care, and hair products are included in the personal care segment. Products in this line include liquid hairstyling products, men’s fragrances, men’s deodorants, foot powder, body powder, and skin care products. Key brands include Brute, Sea Breeze, Skin Milk, Ammens, Vitalis, Condition 3-in-1, Final Net, and Vitapointe.

Brushes and accessories are also included in the personal care segment. Key brands include Revlon, Vidal Sassoon, Bed Head, and Karina.

Personal care net sales were $118.5 million for the second quarter of fiscal 2008 compared to $111 million for the second quarter of fiscal 2007. This represents an increase of $7.5 million, which is a 6.8% increase.

Appliance net sales were up year over year despite offsets by declines in grooming, skin care, and hair products, and brushes and accessories. The Belson business, which we acquired effective May 1, 2007, contributed $6.5 million of net sales for the quarter.

Our housewares segment. Our housewares segment consists of the OXO business. OXO is a leader in providing innovative consumer product tools in a variety of areas, including kitchen, cleaning, barbeque, bar wear, garden, automotive, hardware, storage, and organization. Brands that we sell include OXO Good Grips, OXO Steel, OXO Softworks, and Candela.

The housewares segment net sales for the second quarter fiscal 2008 were $39.4 million compared to $36.2 million in the second quarter of fiscal 2007. This represents an increase of $3.2 million or 8.9%.

Distribution centre shipping issues in the first quarter of fiscal 2007 caused shipping delays resulting in some first quarter sales orders to be shipped in the second quarter of fiscal 2007, causing a difficult quarter over quarter comparison for our second quarter of the current fiscal year. Accordingly, we believe that the comparison of the six months periods ended August 31st, 2007 and 2006, to be more reflective of OXO’s overall operating performance than individual quarterly comparisons during the same time frame.

Houseware net sales were up $11.5 million or 18.7% for the six months ended August 31st, 2007, compared to the prior year period. Sales increases resulted from a continuing trend of product, mix expansion, and geographic expansion in the United Kingdom and Japan.

Gross profit for the second quarter was $68.2 million, which is 43.2% of net sales, compared to $66.7 million, or 45.3% of net sales in our second quarter fiscal 2007. This represents a dollar increase of $1.6 million or 2.3%. Gross profit margin declined as a percentage of sales 2.1 percentage points.

We continue to experience product sourcing cost pressures due to raw material price increases, changes in exchange rates, and labour cost increases. To compensate for rising costs, we are implementing selling price increases when possible, introducing new products, sourcing from alternative suppliers, and focusing on our internal costs.

Selling, general, and administrative expenses for the second quarter was $52.7 million, which is 33.4% of net sales, compared to $50 million, or 34% of net sales in the second quarter of fiscal 2007. This is a dollar increase of $2.7 million or 5.4%. On a percentage basis, SG&A went down 0.6%age points year over year. The decrease in SG&A expense as a percentage of sales is mostly due to an improved distribution cost structure, outbound freight cost improvements, and lower information technology outsourcing costs.

Interest expense for the second quarter fiscal 2008 was $3.8 million, which is 2.4% of net sales, compared to $4.7 million, or 3.2% of net sales, in the second quarter of fiscal 2007. The decrease in interest expense is due to lower amounts of debt outstanding in the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007.

Income tax benefit for the second quarter was $6.4 million, which is a credit of 53.4% of income before taxes, compared to a $1.4 million expense, or 11.1% of income before taxes, in the second quarter of fiscal 2007.

In August 2007, the company and Hong Kong Inland Revenue Department reached a settlement regarding tax liabilities for fiscal years 1998 through 2005. As a result of the settlement, the company reversed tax provisions previously established for those years totalling $7.9 million.

I will now discuss our financial position. Our cash and temporary investments balance was $46.5 million at August 31st, 2007, and we had no borrowings on our $50 million revolving line of credit. In June 2007, we made a $25 million prepayment without penalty on our $100 million senior notes that mature June 2009. Also in June 2007, based on a review of our expected cash flows, we reduced our $75 million revolving line of credit facility by $25 million down to $50 million.

Accounts receivable were $121.9 million at August 31st, 2007, compared to $117 million at August 31st, 2006. On sales in the second quarter of the current fiscal year that were $10.8 million higher than the same period last year. Accounts receivable turnover improved to 70.7 days at August 31st, 2007, from 73.7 days at August 31st, 2006.

Inventories at August 31st, 2007, were $168.3 million, a decrease of $17.1 million from August 31st, 2006. Inventory turnover improved to 2.3 times at August 31st, 2007, compared to 1.9 times at August 31st, 2006.

Shareholder equity increased $51.5 million to $543.9 million at August 31st, 2007, compared to August 31st, 2006.

I’ll now turn it over to Gerry for additional comments and questions. Thank you.

Gerald Rubin

Thank you, Tom. Operator, we’d like now to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Gary Giblen with Goldsmith and Harris. Please state your question.

Gary Giblen - Goldsmith and Harris

Hi, good morning, Gerry.

Gerald Rubin

Good morning, Gary.

Gary Giblen - Goldsmith and Harris

I’m wondering whether the modest guidance reduction is due to specific order cancellations or major push ads or just a general sense of conservatism from your dealings with the major retailers.

Gerald Rubin

Right now it’s not based on any orders or anything we lost, it’s just us being more conservative as we look over the next six months. And that’s basically it. So we thought we would verbalize it with everybody.

Gary Giblen - Goldsmith and Harris

And are you finding major retailers destocking in terms of days on hand inventory or are they just adjusting perhaps for slower consumer take-away?

Gerald Rubin

Well, several of our major retailers have cut their inventories. They do want more turns. I don’t believe that has hurt us, nor do we believe that it causes less sales. It’s just that the retailers want to keep less inventory and our job is to supply them on a daily basis with all the merchandise that they need. But I don’t think any of that has affected the sales of what’s going on in the stores.

Thomas Benson

Gary, we do not get long-term orders from any of our customers, long lead times, so we’re, they look at their consumer off take and their systems re-order. So a lot of the retailers have been, had slowing year over year same-store sales. So over time we feel that’s going to affect us.

Gary Giblen - Goldsmith and Harris

Okay. So you’re really just anticipating rather than observing current reality. I understand. And then just, so, on the same topic, in the first quarter call a lot of discussion had that new products being good for gross margins, as well as for sales, because, you know, you can kind of instantly build in fully inflated raw material costs into the new products. So is the difficult retail environment affecting the new product placements and are you getting the sales and margin benefit from the new products that you anticipated?

Gerald Rubin

Gary, on the new product introductions, yes, the gross profit is larger. Of course, it’s offset by other products where we have price increases from the factories and we have not passed that on yet. And the new product sales will, of course, come mainly in the third quarter and the fourth quarter for us is when we do our seasonal business. So hopefully that’s very positive. We have good placement in all the retailers and I just, we just have to be conservative of what’s going to happen this fall and Christmas.

Gary Giblen - Goldsmith and Harris

Okay, but no particular trouble spots in the, yeah, because of the retail environments in the new product placements or sell through.

Gerald Rubin

No, we have good product. The new products have good placement and now it’s up to the retailers to get their customers in the store to buy the products.

Gary Giblen - Goldsmith and Harris

Okay, great. Thanks, Gerry. I’ll probably come back with more questions. I’d better give up the floor, now. Thanks.

Operator

Our next question will come from Kathleen Reed with the Stanford Group.

Kathleen Reed - Stanford Group

Hi, good morning. Can you tell us if the appliance sales in the current quarter that you just reported, were they up if you exclude the Belson acquisition?

Gerald Rubin

Yes, they were. They were up slightly for the quarter without Belson.

Kathleen Reed - Stanford Group

Okay. And your Bed Head, I think, appliances shift out in June. Can you just tell us, you know, how that was received? I think that was a real big launch for you and I would have thought more sales would have been booked for Bed Head this quarter, but maybe that’s not the case if you think the sell-through will happen 3Q and 4Q. But are retailers ordering closer to the season? So maybe we should see some higher sales from the new Bed Head launch in 3Q and 4Q as well?

Gerald Rubin

You know, included in the sales were the new introduction of Bed Head. Some were shipped in the first quarter and some retailers in the second quarter. In fact, some were even in the third quarter got their initial shipments the first weeks of September. So we’re happy with the distribution that we have, and we’ve also been very happy with the sales. It’s a higher priced line, but we do have distribution in major retailers all over the country.

Kathleen Reed - Stanford Group

Okay. And with your sales revision, are you able to say, is it across the board or are there some segments that are being more negatively impacted than others? It sounds like OXO’s continuing to do really well. And I guess, is the Belson guidance still $20 million to $30 million or is that somewhat, you know, reduced too because you’re taking a more cautious approach to sales?

Gerald Rubin

No, the Belson number that you just mentioned is what we think we can do. What’s happened with Belson, because we just took it over a few months ago, there were no new products in the pipeline and we’re developing a lot of new products which will be coming out over the next couple of months. So we’re very optimistic about Belson because what they have is not new products and what we’re going to have is a lot of new products. Because that’s our expertise is developing new products. And we have a lot of new products and many of them are going into the Belson division.

As Tom told you in personal care, we have weaknesses in our grooming products, skin care, and our brush and accessory departments. So those are the weaknesses offset by larger sales that we have in our appliance division. And international’s doing very well.

Kathleen Reed - Stanford Group

Okay, but are you able just on the sales revision, is it kind of, you know OXO’s still doing well and the other, you know, it’s more personal care? Or is it kind of just more cautious for both divisions combined?

Gerald Rubin

I would say the sales revision is more associated with North America, our international areas where we feel that we’re going to grow stronger than the North America region in percentage terms, and both in our personal care and in our housewares we think that there’s going to be some softening from the historical growth while we work through this economic time. I mean, the housewares things are very tied to people redoing their kitchen or buying appliances or new homes and everything. And as we know, that’s slowed down currently.

Kathleen Reed - Stanford Group

Okay. And just on the gross margin decline in the quarter down, I think, 210 basis points, can you, is there any way to say more was on, you know, I think in your last quarter there was some increase promotion for Brute and so that netted against sales and there was some pricing pressures on some base lower level appliances. Can you quantify, you know, is it much more this quarter raw materials or is it some of these other issues? Or is it the direct import issue? You know, retailers moving to direct import. I know Belson is a lower gross margin business, but is there any way to talk a little bit about the gross margin decline?

Gerald Rubin

I think the main reason is cost of goods, of what’s happening domestically, and our foreign manufacturers. Because of whether we use a lot of plastic, we use metals, and all those costs have gone up. Plus the exchange rate between the Chinese Yuan and the Hong Kong dollar has deteriorated in the last year from 8.28 to about 7.5, almost about 9% there. So it’s all in the price of goods and what we’re doing is, of course, getting better profit and new products and trying to get price increases wherever we can to offset that.

Kathleen Reed - Stanford Group

Have you announced any price increases on anything for the fall that would help your margins in the second half?

Gerald Rubin

Yes, we do. We do have price increases. As a matter of fact, we have price increases almost all the time. But no, we do have price increases that are starting now.

Kathleen Reed - Stanford Group

I know it’s hard to say, but can you just give us an average? Is it on appliance, say, mid-single digits, or is there any way to just quantify that a little bit?

Gerald Rubin

I would say over the broad spectrum of all the products, of OXO and the appliances, I would say somewhere around 4%.

Kathleen Reed - Stanford Group

Okay. And just finally, do you have a current share repurchase program and what would be, I guess, priorities for cash and if you think a share repurchase would do you well with the stock at these levels? Thanks.

Gerald Rubin

That’s something that we’re currently discussing. We estimate that by the end of the fiscal year in February 2008 that we’ll have approximately $100 million in cash and we’re looking very strongly at repurchasing stock. You know, Tom gave you some of the statistics. I think the stock price today is selling somewhere around book value. So there’s nothing excessive in the price of the stock. As a matter of fact, we think it’s very, very cheap and we will certainly look into doing something about it.

Kathleen Reed - Stanford Group

Okay. Thank you so much.

Operator

We’ll take our next question from Bill Leach with Neuberger Berman.

Bill Leach - Neuberger Berman

Good morning. As I calculate it, your revised guidance implies EPS growth of about 10% for the back half of the year. I was just wondering about your confidence in that guidance because when you read the 20-year press release you don’t sound too optimistic.

Gerald Rubin

Well, you know, we looked at every division that we have and every customer and we came up with the best estimates that we believe that our sales are going to be for the next six months, and that’s what we reported.

Bill Leach - Neuberger Berman

Do you anticipate gross margins being more stable for the balance of the year?

Gerald Rubin

Basically that’s what we’re looking at. You know, I think for the first six months we were at 43% and, you know, of course we’re doing everything possible to get that 43% up, but some of our estimates are based on some of those numbers looking forward.

Bill Leach - Neuberger Berman

Okay. Thanks a lot.

Operator

We’ll go next to Mimi Noel with Sidoti and Company.

Mimi Noel - Sidoti and Company

Hi. Tom, I thought it was interesting in your prepared remarks at first when you were looking at the gross margin you were looking at it sequentially versus the May quarter rather than year over year. Do you think that’s the best way to look at the gross margin when looking at projections and, that being the case, that there’s not as much seasonality to the gross margin as, say, there used to be.

Thomas Benson

I think that in our first, second, and fourth quarter the mix of products are approximately the same. Historically in our third quarter we have more health and wellness products, which historically have carried a lower margin. So I think it’s good to look at it both ways. So I’m looking at it both ways, but the third quarter is a little different mix than the first, second, and fourth.

Mimi Noel - Sidoti and Company

Okay. And your comment was that there’s more health and wellness in the November quarter, which is usually diluted.

Thomas Benson

Correct.

Mimi Noel - Sidoti and Company

Okay. And then I was also hoping, and maybe, Gerry, you want to chime in on this, looking at the relationship between the decent sales increase, the nearly 10% decline in inventory, and the 200 basis point drop in the gross margin, is there anything that I can conclude from that? Was any of the margin erosion calculated to the extent that you were discounting more heavily?

Thomas Benson

No, none of it because of discounting or dumping of product or anything.

Mimi Noel - Sidoti and Company

Okay.

Thomas Benson

It’s all cost of goods.

Mimi Noel - Sidoti and Company

So all inflationary pressure.

Thomas Benson

Right.

Mimi Noel - Sidoti and Company

Okay. And you mentioned that 4% general price increase to Kathy before, could you say that was similar in the August quarter?

Thomas Benson

No, but the pricing increases that I give you are, you know, certainly don’t always take effect on one day, nor does it apply to all customers.

Mimi Noel - Sidoti and Company

Okay

Thomas Benson

But we do have price increases.

Mimi Noel - Sidoti and Company

Okay. Then maybe the better question to ask is, the potential for benefit from price increase is better in November than it was for August? Or can you not make that generalization?

Thomas Benson

You know, I would say yes, but I don’t know if I can tell you right now until the end of the quarter whether the gross profit will be greater in the third quarter than it was in the first six months because of what’s going on with commodity pricing and making our products.

Mimi Noel - Sidoti and Company

But at least in isolation maybe you have a little bit more of a tail wind for the price increases in the November quarter.

Thomas Benson

Hopefully.

Mimi Noel - Sidoti and Company

Okay. I won’t hold you to it. Just trying to make sure --

Thomas Benson

We’re doing our best.

Mimi Noel - Sidoti and Company

That’s all I have. Thank you, Gerry. Thank you, Tom.

Thomas Benson

Thank you, Mimi.

Operator

(Operator Instructions) We’ll go next to John Harlow with [Barrel Henley].

John Harlow - Barrel Henley

Tell me what the D, D&A was in the quarter.

Gerald Rubin

Which?

John Harlow - Barrel Henley

Depreciation and amortization. It was 3.5 last quarter; what is it this quarter?

Thomas Benson

John, just a second. It’s $3.627 million.

John Harlow - Barrel Henley

Say again? Three what?

Thomas Benson

Three million, six-twenty-seven.

John Harlow - Barrel Henley

Thank you. And what would the gross profit margins look like excluding Belson?

Thomas Benson

As we’ve stated, Belson has a lower gross profit margin. We haven’t calculated without Belson, but would be slightly higher. Belson represented just over $6 million sales for the quarter. So it would be slightly higher.

John Harlow - Barrel Henley

And what was the Belson’s inventory in the quarter?

Thomas Benson

I’m going to say approximately $9 million. I don’t have the exact number in front of me.

John Harlow - Barrel Henley

Tom, remind me what you told us it was last quarter. Was it 6.5 or 7 or something like that?

Thomas Benson

No, I think it was pretty much the same. It was in the same range.

John Harlow - Barrel Henley

Okay.

Thomas Benson

Belson inventory has not changed significantly. I can make that statement.

John Harlow - Barrel Henley

That’s great. Thank you very much.

Operator

We’re go next to Gary Giblen with Goldsmith and Harris.

Gary Giblen - Goldsmith and Harris

Yes, hi. Yes, can you hear me?

Gerald Rubin

Yes, Gary.

Gary Giblen - Goldsmith and Harris

Sorry. Just wondered, what was the gross margin comparison in appliances, since that was the relatively stronger segment?

Thomas Benson

This is Tom Benson. We don’t give out specific gross margins by segment.

Gary Giblen - Goldsmith and Harris

Okay. I mean, it’s usually available in the cue, but it’s not there yet. I mean, just subjectively, were gross margins favourable? Are you pleased with gross margins in the appliance division?

Thomas Benson

The appliance division, well, the appliance division gross margins were better year over year.

Gary Giblen - Goldsmith and Harris

Were, I’m sorry, were improved year over?

Thomas Benson

They were improved year over year.

Gary Giblen - Goldsmith and Harris

Good. All right. No, that helps. Thank you. And the, you know, versus the consensus modelling, you know, it looks like the company guidance is, you know, is different those on SG&A percentage and gross margin. So the, you know, I can understand the gross margin part because of the obvious cost pressures and whatnot, but in other words, are you performing where you want to be on SG&A or are there any areas for distinct improvement later in the year on that?

Gerald Rubin

SG&A is performing how we’re expecting. We were expecting cost savings on distribution and freight and we’re achieving those. Our introduction of new products, specifically Bed Head, carries more advertising than our historical lines, but there’s, I mean, we’re constantly working to lower SG&A as a percentage of sales, but there’s no big areas of disappointment for us in there.

Gary Giblen - Goldsmith and Harris

Okay. Will that Bed Head advertising continue for a while or is that just introductory?

Gerald Rubin

It’s going to continue at least through the third quarter.

Gary Giblen - Goldsmith and Harris

Okay. That’s very helpful. Thank you.

Gerald Rubin

Okay.

Operator

(Operator Instructions) We’ll go next to Steve Freidman with Wachovia.

Steve Freidman - Wachovia Securities

Good morning, all. I think most of my questions have been answered, but just want to repeat. The cost of goods increased the 210 basis points. Tom, you mentioned you had raw material costs as part of it. You said some of the others was ... could you tell me what that is and what the offsets besides price increases?

Thomas Benson

Well, there’s really three components of the cost side. There’s the actual raw material or costs going up, it’s the change in exchange rate, as Gerry had discussed, and it’s also just inflation, the pressures on labour costs from our sourcing partners. And what we’re doing about it is we’re doing price increases, I mean, and those are long negotiations with our retailers and we’re working very hard on them. We’re also looking at alternative supply sources. And we’re working on our internal costs to try to mitigate as much as we can the cost increases that we’re getting.

Steve Freidman - Wachovia Securities

Excuse me. Did I hear also that the third quarter product mix is more dilutive or that you feel that your gross margin might, with the offsets that you’re implementing, the gross margin might improve in the third quarter?

Thomas Benson

What I’d stated was historically the third quarter has a higher percentage of sales of health and wellness products than the first, second, or fourth quarter. It’s more of what I would call seasonal in-and-out business. And the health and wellness products carry a lower gross margin than our other type of products. When I talk about health and wellness, those are the spa and massagers, and slippers, and things like that. Foot baths.

Steve Freidman - Wachovia Securities

Okay. Okay, can you also just comment how, I mean, you’re a month and a half into the third quarter. How do you see it realizing that a lot of your business is, I think you’ve mentioned, is just 30 days out. Do you see a move to a good holiday season? Or are you just being cautious? Or can you see anything in the third quarter that is positive?

Thomas Benson

The sales during the third quarter build each month from September-October to November. And basically what’s happening is the retailers are loading their stores and their warehouses for the business season, which is basically mid-November through December. Our September sales were softer than we would like. October is higher than September at this point and growing. Really what’s happening is the retailers are just loading their stores. It’s really going to come down to the consumer off-take that happens later in the quarter. And as that happens we’ll continue to get re-orders.

Steve Freidman - Wachovia Securities

So would it maybe be fair to say that the meat or the heart of the third quarter is still yet to be seen?

Thomas Benson

The second half of the third quarter historically is stronger than the first half.

Steve Freidman - Wachovia Securities

Okay. Thank you very much.

Thomas Benson

Thanks, Steve.

Operator

Well take our next question from John Harlow with Barrel Henley.

John Harlow - Barrel Henley

I meant to ask y’all if the tax credit, the Hong Kong business, is that a non-cash item?

Thomas Benson

The $7.9 million that went through the P&L, out of that we’re going to get about a $5.5 million cash refund.

John Harlow - Barrel Henley

Okay. Thanks.

Thomas Benson

It’s part and part.

John Harlow - Barrel Henley

All right.

Operator

Well go next to Matt Sirovich with Scopia Capital.

Matt Sirovich - Scopia Capital

Hi, guys. I had a quick follow up on the taxes as well. That cash portion of the settlement that you’ll be receiving, I imagine that’s not reflected in your cash balance at August 31. Is that right?

Thomas Benson

That’s not in our cash balance. We expect to receive it in the third quarter. We haven’t received it yet, but we expect over the next six weeks to get it.

Matt Sirovich - Scopia Capital

Okay. And the tax asset that you had on your balance sheet will just go away?

Thomas Benson

That will go away here in the third quarter also. As we pay what we owe. And then we’ll get refunded the difference.

Matt Sirovich - Scopia Capital

Can you say, maybe you have already, what your total debt number is at quarter end?

Thomas Benson

It’s $225 million.

Matt Sirovich - Scopia Capital

Two-twenty-five. And with the settlement of that Hong Kong tax dispute, would you say that your tax structure and tax rates going forward are fairly stable or are there any other significant tax disputes that you’re involved in?

Thomas Benson

I think our rate is stable. I think we have open tax disputes with the internal revenue service and we’re in multiple taxing jurisdictions. I’m going to say we’re in probably taxing jurisdictions and we’re subject to audit in all those jurisdictions. So as you know, taxes is something that’s constantly looked at by outside authorities here. The areas where we have large operations are the US, are various Latin American companies, Europe and Asia. So those are the areas I feel that would have the highest exposure. And we think Hong Kong, which has been hanging over us, we feel that we’ve put that to bed.

Matt Sirovich - Scopia Capital

And in terms of the IRS disputes, can you give any colour on the magnitude of those disputes?

Thomas Benson

Those are disclosed in our cue and they’re much lower than the Hong Kong one. The last time we settled the US one we ended up having a favourable settlement.

Matt Sirovich - Scopia Capital

Okay. Last question I have is just on the distribution centre. Would you say that all of the distribution centre issues are behind you and that’s operating exactly how you would have expected it would operate, or is there still room for improvement?

Gerald Rubin

I think it’s operating the way we projected and, yes, there is room for improvement. Every week we look at it and try to improve our efficiencies. The more business we do, the lower the percentage costs of running the warehouses. So a lot of it is based on sales. Sales go up and it costs us less to operate the warehouse. Like, basically the percentage will go down, certainly in the third quarter over what it was in the first and second quarter. But every week we’re looking for efficiencies. But basically we’re happy with what we have.

Matt Sirovich - Scopia Capital

Okay. All right. Thanks a lot.

Operator

We’ll go next to Gary Giblen with Goldsmith and Harris.

Gary Giblen - Goldsmith and Harris

Yeah. Hi, Gerry. You mentioned that the share repurchase, corporate share repurchase is possibly under consideration. How about, what are your feelings about personally buying shares at these depressed levels?

Gerald Rubin

Well, I think it’s a good buy. I think we have thousands of shareholders. I’d like to see them come in and buy. I always say this, is the company the only one that should be buying the company shares? If that was the case, you could make a case for why having shareholders. I think the shareholders ought to be buying the shares if they want to be shareholders.

Gary Giblen - Goldsmith and Harris

Right. I mean, would a management buy-out be something that would be considered at some point in the future? Or is that not on the table?

Gerald Rubin

Well, you know, at these prices that’s something that’s on the table. You know, the ratio of EBITDA versus what our stock price is selling, you all can figure out, is very, very low. And it might be the best acquisition Helen of Troy can ever have.

Gary Giblen - Goldsmith and Harris

Yeah, I think there’s a good case for that. Okay. Thank you for sharing your thoughts.

Gerald Rubin

Thanks.

Operator

If there are no further questions, I’ll return the conference back to Gerald Rubin to conclude.

Gerald Rubin

Thank you, everyone, for participating in our second quarter earnings conference. I look forward to speaking to all of you at the end of the third quarter, if not sooner. Thank you all very much for participating.

Operator

Ladies and gentlemen, if you wish to access the replay for this call you may do so by dialing 8882031112 with replay pass code 4986155. This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may disconnect now.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Helen of Troy F2Q08 (Qtr End 08/31/07) Earnings Call Transcript
This Transcript
All Transcripts