Helen of Troy (HELE)Buy Report

Miguel Gutierrez

I. Qualitative Profile

Helen of Troy is a company that is a seller, distributor, licenser, designer, and online

provider of consumer products. The company sells products in the United States, Canada, Latin

America, Europe, and several other countries. It is made up of four segments which are

Housewares, Healthcare & Home Environment, Nutritional Supplements, and Personal Care &

Beauty. The Housewares segment includes products used for cooking such as knives, pans, and

blenders. The Healthcare & Home Environment provides products such as humidifiers and water

filters. The Nutritional Supplements segment includes items such as skin ointments and vitamins.

Last the Personal Care segment includes products such as makeup and hair care. Helen of Troy

operates in these four segments through a portfolio of owned brands and licenses, with names

such as Honeywell, Vicks, Pur, Braun, Dr. Scholl's, BedHead, Toni & Guy, and Hydro Flask.

Helen of Troy is part of the Household Durables which is a subsector in Consumer

Discretionary, although Helen of Troy exhibits various characteristics of the Consumer Staples

segment and several of their competitors are classified under Consumer Staples. Some of their

key competitors that we used to analyze Helen of Troy were Procter and Gamble, Jarden

Corporation, Spectrum, Kimberly-Clark, Unilever, and Usana. What differentiates Helen of Troy

from its competitors is that the company currently trades at a P/E (price to earnings) ratio of

22.6x which is lower relative to its competitors Procter and Gamble, Jarden Corp, Kimberly

Clark, and Spectrum with each at 25.6x, 77.5x, 48.6x, and 34.4x respectively. Along with this

and other metrics, we see Helen of Troy as a value company. Second, the company is a small

player in the Consumer Durables segment, but has had stronger growth in the recent past

organically and through acquisitions. Third, through its acquisitions and licensing agreements

Helen has begun to gather a strong portfolio of well known and low elasticity brands which are

trusted by consumers and purchased frequently. Fourth, the company is able to maintain its

flexibility by partnering with well established brands that offer possibilities for product

innovation and design. If these partnerships are not longer beneficial though, the company can

terminate them and seek out new partnerships.

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As seen from the graph above, where gray represents levered free cash flow, orange

represents gross profit, and blue represents total revenues. Helen of Troy has had strong

performance over the past 5 years, but is not followed as strongly by analysts because bigger

names such as Procter and Gamble and Unilever tend to overshadow it. Nevertheless the

company has been growing in all four of its segments. Total revenue has increased on a 5 year

CAGR of 17.31% compared to the competitors’ average of 5.29% The same holds true for gross

profit which was 15.28% on a CAGR basis. In addition, the company has had the lowest amount

of leverage at 49% relative to its competitors, which means the company can stay lean with its

levered free cash flow as it has in the past 5 years.

The company currently does not offer dividends, but we view this is as an opportunity for

it to continue to invest in positive NPV projects which will continue to fuel its growth. In

addition, the company is strongly positioned to grow due to low leverage, strong cash flow

percentage, and low cost of goods sold, which will be explained in detail later.

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The latest acquisitions for Helen have been the purchases of Steel Technology, Vicks

Vaposteam, Pur Water, and OXO International. Through its tactical acquisitions the company

has grown their segment revenues and gained a widely known portfolio of brands with low

elasticity.

The Steel Technology acquisition, which owns a company called Hydro Flask, will allow Helen

of Troy to enter the growing $270 billion segment of athletic leisure. Hydro Flask is the second

largest provider of hydration vessels, the company is expected to have sales revenue in 2016 of

$65-$70 million, also the acquisition is expected to have an effect immediately on Helen’s

EBITDA. Hydro Flask has grown in revenues since 2014 by about 4x, with the largest amount of

growth happening in 2015 by about 50%, and the company also leads the growth in the hydration

vessels/bottles category.

Another recent acquisition was that of Vicks VapoSteam from Procter and Gamble.

Vicks VapoSteam is the leading company in the inhalant category of Consumer Durables. Vicks

recently combined their devices and consumables segments which now enables them to invest in

additional product development and marketing. The Vicks VapoSteam Line as of 2014 generated

revenue of $10 million per year which will add to an increase in revenue and profitability for

Helen of Troy. In addition, the acquisition of Vicks will further enhance Helen’s already strong

portfolio of well trusted brands.

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In terms of segment revenue, both the Housewares and Health & Home segments have

had continued revenue growth on average by 7.65 % and 6.75% respectively. Some tailwinds

for this have been low interest rates, low unemployment rates, and the overall U.S economy

continuing on its bullish trend. All these have allowed a greater amount of people to purchase

homes and the products that go inside of these homes. The health segment has also seen revenue

growth as more people are purchasing wellness related products due to a growing trend in higher

health conscientiousness.

Finally, Helen of Troy has gained stronger management by recently appointing Julien

Mininberg as CEO in 2014. Prior to this, Mininberg had been the CEO for Kaz, which is a

wholly owned subsidiary of Helen and is part of the Health and Home Care segment. Before that

he worked for Procter and Gamble for 15 years where he lead management and marketing in

brands such as Vicks, Pepto Bismol, and Metamucil. Mininberg also managed the cleaning

products division in Latin America and Central America. We see a strong foundation in terms of

the experience and brands that Mininberg has been exposed to, and we see him being able to

apply the knowledge and experience to help Helen of Troy grow further. An example of his

future vision for the company was in the recent acquisition of Healthy Directions which will

offer a deeper breath of health related products and meet growing demands of the health sector.

This acquisition will add to sustained growth and create extra value for shareholders.

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2. Competitive Analysis

The market environment for consumer-product companies is highly competitive due to

global, regional, and local competitors offering a variety of similar products. Because of this,

switching costs are low for consumers who have easy accessibility to choose products based on

either value of brand or on cost of lower priced alternatives. Helen of Troy’s strategy is to

continue to be innovative and acquire well recognized brands that will add to its sustainable

competitive advantage.

Helen does not face a high degree of threats from entrants, because research and

development costs associated with entering this market are quite high. If a competitor does enter

the market successfully, then it must compete with other well recognized brands in order to attain

shelf space in local drugstores, supermarkets, etc. Overall the threat of entry is quite low.

In terms of buyer power there are two perspectives; one is that large buyers like Walmart

and Target that have strong buyer power, because they are nationally and globally recognized

and can set price limits and limits of placement of products in their stores. The other perspective

is in terms of consumer buyer power which is relatively strong, because individuals can purchase

from other competitors, such as Procter and Gamble or Kimberly Klark. A strategy could be for

Helen of Troy to offer more of its brands online in order to maintain its competitive advantage,

which it has begun to do with acquisition of Healthy Directions.

In regards to weaknesses, Helen of Troy is vulnerable to currency headwinds due to its

global operations, especially with the increasing strength of the US dollar. In the recent quarters,

Helen has seen a decline in the beauty segment. This was partially due to foreign currency

fluctuations reducing its sales revenue by around 2.6% as well as to competitive pressures and

lost of distribution at retail stores. It also is vulnerable to impairment of goodwill in their

trademarks as the company is required to to perform an annual review of impairment, such as in

2009 when the company had a loss on their income statement mainly due to a $102 million

dollar impairment in the personal products segment.

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II. Focused Financials & Valuation Comparable

There we several key metrics that we looked at when comparing Helen of Troy to its

competitors. Some were specific to the Consumer Durables and other were general valuation

metrics.

The company valuation metrics we focused on were price to earnings, debt to equity and

free cash flow to sales. Helen had the second lowest price to earnings compared to its

competitors at 22.6x. This means that the company is trading at about 22 times earnings, and we

see this as a strong sign of undervaluation given the amount of growth that the company has had

in the past five years and relative to the competitor average of 35.5x.. The next metric we

focused on was free cash flow to sales. We saw this as a crucial measurement for a company that

is seeking to grow and gain market share relative to its competitors. Currently, Helen has the

third highest free cash flow to sales at 11.91%, this means that the company is creating about

$0.12 cents of free cash flow per every dollar of sales. This is relatively higher compared to its

main competitors, which means the company has the tools to continue its growth. Last, the most

important metric that we found was their debt to equity, currently Helen holds the lowest at 49%,

compared to the industry average at 655%. We again emphasize this as a key tool for the

company to continue its growth because they are able to maintain flexibility and can fund

through debt if necessary. In our average for the debt to equity, we did not include Kimberly

Clark’s of 19,597% because we saw this as an outlier.

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In terms of industry specific metrics for Consumer Durables, the first one we looked was

cost of goods sold; here the company has the third lowest metric relative to its competitors. This

is very important, because normally smaller market cap companies are expected to have higher

costs when compared to their larger counterparts. In the case of Helen though, it is able to pay

$0.58 cents per dollar of revenue to acquire their goods when compared to that of giant Procter

and Gamble at $0.68 cents per dollar of revenue.

Another measure we looked at was the company’s quick ratio at 1.06. This means that the

company is able to cover their current liabilities 1.06 times over. This is important for a company

in the Consumer Durables sector that wants to stay flexible, as well as be able to cover its

liabilities such as payables to suppliers. When compared to Procter and Gamble's at 0.55x and

Unilever at 0.63x, Helen has a greater ability to cover its current liabilities. Last, we want to

reiterate again their low debt to equity at 49%. We see this as a very strong measure, because it

gives the company greater flexibility.

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We also analyzed the company’s compounded annual growth rate over the past five

years. In terms of total revenues, Helen has the highest growth rate of 17.31% which is well

above the average of 5.29%, this was due to the fact that is has strong strategic acquisitions and

partnerships along with offering a breath of trusted brands. Consumers are also purchasing more

especially as the economy has grown since the 2008 crisis.

Also the company’s gross profit has increased on a 5 year CAGR average basis at

15.28%, meaning that as the company has grown they have been able to lower their cost of

goods sold at a higher pace compared to the competitors average and Proctor and Gamble's

negative growth in this of (1.74%). In gross profit growth the company has the highest amount

relative to all the competitors. As previously mentioned this is very important for a company that

competes with Consumer Durables giants whom benefit from economies of scope. Last, the

company has grown in terms of levered free cash flows on a 5 year basis by 20.54%, which is the

second highest growth rate compared to its competitors.

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We compared Helen of Troy over the past three years to the S&P 500 index and the S&P

500 Consumer Durables index. Helen had a total return of 181.02%, and outperformed the S&P

500 index by 142.52%, as well as the S&P 500 Consumer Durables sector by 140%.

These returns line up with Helen's low beta of 0.83, which shows that the company is not

as heavily affected by market volatility relative to the whole consumer discretionary sector

(index XLY) with a beta of 1.03, so we expect to see consistently strong returns as it has done in

the past.

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III. Formal Valuation (Discounted Cash Flow)

In our analysis of the Discounted Cash Flow we made adjustments to Helen of Troy's

perpetuity growth rate, EV/EBITDA multiple, revenue streams, and capital expenditures.

Initially our Exit EV/EBITDA had a multiple of 16.4x. We wanted to use something more

conservative since the model was accounting for their latest acquisition of Hydro Flask which

increased EBITDA. When we referenced the company’s historical patterns in regards to its

acquisitions and non-acquisition periods, we came up with a more conservative multiple of 12x,

which was an average of what we expected for the company.

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For the Perpetuity Growth Method model, we adjusted the perpetuity growth rate set at

2% to a slightly more conservative rate of 1.9%. Even though the rate we chose was high relative

to its competitors, we believe this to be the case for Helen based on growth metrics we

mentioned earlier. Also, the model forecasted yearly revenue increases of 3%, but we increased

its revenues to match the years of high capital expenditures/acquisitions and decreased it for the

nears of no acquisition activity. In the past Helen had an average increase in revenue of 27% on

years of acquisition, so we chose a more conservative increase of 12%, and in the years with no

acquisitions we chose 5% revenue increases. Our assumptions for both of these were based on

historical rates. We also increased the capital expenditures by less than 1% per year, since we

expect the company to continue with strong acquisitions. In doing this we did not adjust

depreciation since we believe the estimates that the model used were accurate given their 3%

increase in the past couple of years and saw the 2% default as a conservative measure.

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Our results for the EBITDA Multiple method showed an estimated value per share of $114 with

a 12% upside, and for the Perpetuity Growth Method we had an estimated value per share of

$109.58 with an upside of 7%. We see this as another strong reason the company is undervalued,

given its price as of March 29, 2016 at $103.01.

V. Conclusion

In conclusion, we know Helen of Troy will be a solid company to add to the Ann Rife

Portfolio because of both its quantitative and qualitative factors. Helen’s valuation metrics prove

the company is undervalued when compared to their competitors. It has both outperformed the

S&P 500 and S&P 500 Consumer Durables. From the financial analysis Helen is relatively

undervalued and we expect their 12 month target price to be $109. They are also a defensive play

in the largely volatile Consumer Discretionary sector which was more affected in the first quarter

of 2016. Helen also offers a strong portfolio of well recognized brands that consumers continue

to trust and purchase. Finally it has had strong growth both organically and through acquisitions,

thus we see it continuing to gain market share and becoming a strong player for the consumer

products segment.

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Resources

Capital IQ:

(n.d.). In S&P Capital IQ . Retrieved March 29, 2016, from S&P Capital IQ.

Net Advantage:

(n.d.). In Net Advantage. Retrieved March 29, 2016, from S&P Capital IQ Net Advantage.

Bloomberg Database:

(n.d.). In Bloomberg. Retrieved March 29, 2016, from Bloomberg Database.

Yahoo Finance:

(n.d.). In Yahoo Finance . Retrieved March 29, 2016, from http://finance.yahoo.com/q?s=HELE

Business Wire:

(2016, February 26). In Helen of Troy Announces Agreement to Acquire Hydro Flask® .

Retrieved March 29, 2016, from

http://www.businesswire.com/news/home/20160229005806/en/Helen-Troy-Announces-

Agreement-Acquire-Hydro-Flask®

The Street Insider:

(2014, September 2). In Helen Of Troy Ltd (HELE) Warns for FY 2015. Retrieved March 29,

2016, from http://www.streetinsider.com/Guidance/Helen+Of+Troy+Ltd+%28HELE

%29+Warns+for+FY+2015/9799039.html

Vapo Stream:

Beckerman, J. (2014, September 2). In Procter & Gamble Sells Vicks VapoStream U.S. Business

to Helen of Troy. Retrieved March 31, 2016, from http://www.wsj.com/articles/procter-gamble-

sells-vicks-vapostream-u-s-business-to-helen-of-troy-1427842613

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Wilkes, D. (2015, April 2). Helen of Troy acquires Vicks VapoSteam in US. In OTC Tool Box.

Retrieved March 31, 2016, from http://www.otctoolbox.com/news/helen-of-troy-acquires-vicks-

vaposteam-in-us.aspx

Wiki Invest:

Dunnigan, S., Sassorossi, T., & Staley, K. (n.d.). In Wiki Invest. Retrieved March 31, 2016, from

http://www.wikinvest.com/stock/Helen_of_Troy_%28HELE%29

Market Watch:

10-Q: HELEN OF TROY LTD (2016, January 11). In Market Watch. Retrieved March 31, 2016,

from http://www.marketwatch.com/story/10-q-helen-of-troy-ltd-2016-01-11

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