Newell Brands' Q1 Results Offer A Glimmer Of Hope

|
About: Newell Brands Inc. (NWL)
by: JP Research
Summary

Better than feared 1st quarter results may be a step in the right direction.

Lower than expected overhead expenses help deliver an earnings beat.

Guidance for Q2, however, was rather disappointing.

The business remains challenged with core sales still expected to decline.

Despite progress with the transformation plan, much uncertainty remains regarding potential growth catalysts.

Newell Brands (NWL) has embarked on its Accelerated Transformation Plan with the goal of seeing a return to growth. It is aiming to restructure into a global consumer product power through cost savings initiatives, e-commerce development, and innovation to spark sales growth and market share gains.

A key component of this strategy involves the offloading of underperforming and non-core assets that account for roughly one-third of overall sales. The company plans to use the proceeds from the divestitures to lower its debt load, maintain the dividend, and make share repurchases. If it can successfully execute on this plan, it will not only simplify its brand portfolio but improve operational efficiency and become a more shareholder-friendly business.

While the transformation plan would serve to narrow Newell’s focus, the company remains burdened by its handling of the Jarden acquisition in 2016. When the merger closed, Newell appeared to be a stronger force in the consumer staples sector with over $16 billion in sales, but it has since seen its portfolio wither down to $8-9 billion in sales.

Newell’s recent history has also been marked by repeated negative earnings revisions that have reduced visibility and shaken investor confidence. The company has been able to sell several businesses in recent months, but much work lies ahead to convince investors that it is indeed on the road to recovery. With core sales expected to remain on the decline in 2019, it will be challenging for management to sustain the positive momentum provided by the recent first quarter results.

Lower Than Expected Overhead Costs Drive A Beat

Newell Brands reported better than expected 1st quarter results beating on both its top and bottom lines.

Adjusted earnings per share came in at $0.14 which was well ahead of the consensus expectation of $0.06. Lower than expected SG&A expenses helped to drive the earnings beat. It marked the 6th straight quarter of positive earnings surprises.

Core sales growth was negative at -2.4% but topped both the Street's expectation of -3.5% and management’s guidance of -3% at the midpoint. While negative sales growth is far from impressive, what was perhaps most encouraging was management’s ability to drive operating margin improvement despite weak sales.

However, while we are patting management on the back, we should remind ourselves that the company is experiencing a decline in core sales to start 2019.

Overall though, the results did indeed surpass expectations and may be a step in the right direction for the beleaguered company.

Broad-Based Core Sales Decline Trend Is Concerning

Newell’s Q1 segment performance was a bit of a downer as all three businesses witnessed negative core sales growth.

The broad-based declines suggest the ghosts of the past remain present challenges for the company. The company did, however, show sequential improvement in its core sales trends for all three segments and in three of four of its operating regions.

Newell recently revamped its reporting into Food & Appliances, Home & Outdoor Living, and Learning & Development all of which comprise roughly a third of total sales.

All three segments have been hurt by declining core sales, the adoption of the new revenue recognition standard, and adverse foreign currency effects. The Learning & Development segment which includes the Writing and Baby divisions is still likely feeling the ill effects of the Toys "R" Us bankruptcy.

On the other hand, a bright spot is the Connected Home & Security business which is performing relatively well and maybe a rare growth catalyst for Newell.

Soft Q2 Earnings Guidance Dampens Q1 Results

Newell Management offered 2nd quarter earnings per share that were significantly below expectations. They are forecasting EPS of $0.34-38 compared to the prior consensus expectation of $0.47.

The culprit here is a lower than expected operating margin guidance range of flat to -60 basis points year over year. This guidance represents a substantial sequential slowdown from Q1’s margin expansion of 179 basis points.

The full year 2019 guidance was left unchanged at a normalized EPS of $1.50-1.65. The full year net sales projection was also reiterated in the range of $8.2-8.4 billion. This would be a slight decline from 2018’s net sales figure of $8.6 billion.

What is perhaps most troubling is management’s expectation for a continuation of declining core sales in the low-single digits. The optimistic investor would hope that management is being rather cautious with these projections, but history and the broad-based nature of the declines are not on its side.

Conclusion

By themselves, Newell’s Q1 results appear rather weak. The glass half-filled investor, however, would point to the positive effects of cost-cutting and progress towards non-core asset divestitures in recent quarters. At the end of the day, it goes in the books as an earnings beat even if core sales remain in a declining trend.

While the Q1 report prompted a moderate volume relief rally in Newell shares, the company still has much to prove to win back investors. A broad-based decline in core sales and soft earnings projections are usually not attributes of a stock that can sustain a rally.

Moreover, risks pertaining to asset sale plans and earnings choppiness lurk ahead. While the Q1 results offered glimmers of hope, the prudent investor should stay on the sidelines at this stage.

Top line growth, improved earnings visibility, and further evidence of a successful turnaround plan would lend to a greater comfort level in owning Newell shares. Given the risks associated with this turnaround story and an EV/EBITDA ratio around 15.2 times, Newell Brands appears fairly valued here.

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.