Energizer Holdings Inc. (ENR) reported second quarter 2011 non-GAAP earnings (excluding charges) of $1.04 per share, comprehensively beating the Zacks Consensus estimate of 91 cents per share. The upside surprise was driven by better-than-expected top-line growth.
Operating Performance
Earnings per share (EPS) on a non-GAAP basis decreased 15.4% year over year from $1.23 reported in the prior-year quarter.
Including charges and one-time items of 49 cents, EPS came in at 55 cents in the quarter, down 56.0% year over year from $1.25.
Gross margin was 45.5% compared with 47.8% in the year-ago quarter. The decline was primarily credited to the negative impact of approximately 180 basis points (bps) on margins arising from the increased coupon and trade promotional activity for the Schick Hydro product launch.
In addition, the inclusion of value priced American Safety Razor (ASR) products for the full quarter reduced comparative gross margin by approximately 150 bps.
Spending on advertising and promotion (A&P) escalated 30.6% year over year (9.7% of total second quarter 2011 revenue versus 8.2% in the year-ago period) due to increased spending on support for the Schick Hydro launch.
Revenue
Revenue increased 10.7% year over year to $1.04 billion in the second quarter, slightly ahead of the Zacks Consensus Estimate of $1.03 billion. Revenue was impacted by lower Household Product sales, offset by higher Personal Care sales.
Household Products: Household Product revenues declined 4.0% year over year to $424.9 million, primarily due to challenging economic conditions and currency devaluation in Venezuela. Excluding the impact of Venezuela, net sales decreased 6.0% in the quarter.
This year-over-year decrease was primarily due to de-stocking of retail holiday inventory accumulated in the prior quarter and increased trade spending in the U.S, partially offset by strong performance in Asian and Latin American markets.
Management noted that the dollar value of the battery category remained sluggish and dipped 2% in the last twelve months in the U.S.
The company has taken various initiatives to restore value in the battery category by implementing a price increases on C, D and 9V sizes and eliminating pack upsizing in the U.S. effective March, 2011.
Personal Care: Personal Care revenues increased 24.0% year over year to $610.4 million. The American Safety Razor (ASR) acquisition made in November 2010 contributed $72.0 million to sales in the quarter and currency had an approximately $9 million favorable impact. Excluding the impact of ASR and Venezuela, net sales increased 7% in the quarter.
Wet shave sales (including ASR) climbed 41.0% in the quarter, driven by higher volumes from Schick Hydro men’s systems and shave preparations, higher sales from women’s products driven by the launch of Intuition Plus in Europe and higher Quattro for Women Trimmer sales and incremental shipments of disposables. This was partially offset by a decline in legacy systems products for men.
Skin Care sales leaped 10% year over yearaided by higher shipments of Wet Ones and higher sales of sun care products. However, Feminine Care sales plunged 12.0% year over year due to lower sales of Gentle Glide, partially offset by continued growth of Sport tampons. Likewise, Infant Care sales inched down 1% year over year in the quarter due to lower sales of bottles and cups, partially offset by higher sales of Diaper Genie.
Guidance
Management revised its earnings forecast for fiscal 2011. Energizer expects segment profit for Household Products to be soft in 2011 while that of Personal Care to be modestly up.
The company expects EPS in the range of $4.00 to $4.20 (down from previous guidance of $4.30 to $4.50), including the impact of the expected Household Products restructuring charges, tax benefit and the negative impact of inventory step-up for ASR.
Excluding unusual items, EPS for fiscal 2011 is expected in the $5.10 to $5.30 range, in line with the Zacks Consensus Estimate of $5.30 per share.
Management expects to witness a significant year-over-year decline in the third quarter, while the fourth quarter is likely to see year-over-year improvement.
Segment-wise, Energizer anticipates the incremental impact of the Schick Hydro and new value brand launches at a key U.S. retailer to drive a mid to high single-digit growth in Personal Care net sales for the remaining two quarters of fiscal 2011.
For the second half of the fiscal year, Energizer expects segment profit for Household Products to be below the year-ago level as category value will likely decline, raw material and commodity costs are estimated to be unfavorable and the company continues to invest in emerging market and technology initiatives.
However, these negative impacts are expected to be partially offset by favorable currencies and the benefits of its previously announced U.S. price increase in C, D and 9V cell sizes, which is expected to add $4 to $6 million in the next six months and the elimination of the U.S. pack upsizing, which is expected to reduce product cost by $6 to $8 million in the second half of the year.
Energizer’s multi-year program aimed at improving its competitive prowess remains on track. According to the plan, Energizer will accelerate its investments in both geographical expansion and in product growth opportunities going forward.
The restructuring plan is expected to result in pre-tax charges of $75.0 million to $85.0 million in 2011 and generate annual savings of approximately $25 million to $35 million by the end of fiscal 2012.
Energizer faces intense competition from Panasonic Corp. (PC) and Procter & Gamble Co. (PG). Energizer currently holds a Zacks #3 Rank, implying a short-term Hold rating on the stock. Besides, we are also Neutral on the stock over the long term.
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