Newell Loses 22% YTD: Can Its Transformation Plan Aid Stock?
Newell Brands Inc. NWL has been
losing investor confidence mainly due to its soft core sales trend
for the past few quarters now. This, along with foreign currency
headwinds, has been weighing on the company’s sales, which lagged
the Zacks Consensus Estimate in four of the last five quarters.
Also, the exit of 60 Yankee Candle retail outlets hurt its top line
in the first quarter of 2019.
Additionally, Newell issued soft earnings and sales guidance for
the second quarter. Normalized earnings per share are anticipated
to be 34-38 cents, significantly down from 82 cents earned in the
year-ago quarter. Core sales are expected to be flat to down 2%.
Foreign currency translations are likely to hurt sales by roughly
150 basis points (bps). It also expects normalized operating margin
between flat and down 60 bps.
Moreover, an anticipated shift in back-to-school orders for some
customers from June last year to July this year is projected to
hurt results in the second quarter.
Driven by all such factors, shares of this consumer products
manufacturer have lost 22% year to date against the industry’s
rally of 13.4%.
Can Transformation Plan Drive Stock
Performance?
Despite these odds, Newell has been progressing well with the
execution of Accelerated Transformation Plan through market share
gains, point of sale growth, innovation, e-commerce improvement and
cost-saving plans.
Key aspects of the plan are restructuring the company into a global
consumer product entity, valued at more than $9 billion.
Apparently, it plans to offload non-core businesses, constituting
nearly 35% of sales; utilize $10 billion of after-tax proceeds from
divestitures and free cash flow to lower debt and make share
repurchase; and retain its investment grade rating and an annual
dividend of 92 cents per share through 2019, targeting 30-35%
payout ratio.
Impressively, execution of the plan will lead to simplification of
the company’s operations, which is likely to reduce number of
manufacturing facilities by 66%, distribution centers by 55%,
brands by 45% and number of employees by 39% as well as reduce
above 30 ERP systems to two by the end of 2019.
Management will also focus on rightsizing the cost structure for
anticipated smaller net sales, remove stranded corporate expenses
and recover the synergies lost through divestitures. These efforts
will help improve operational performance and enhance shareholder
value amid a rapidly changing retail backdrop.
As part of the progress, Newell recently agreed to divest the
United States Playing Card Company to Cartamundi Group — a leading
maker of playing cards and board games. Earlier, the company
concluded divestitures of Process Solutions, Rexair businesses,
Pure Fishing and Jostens businesses. Last year, Newell generated
more than $5 billion of after-tax proceeds from divestitures.
Proceeds from the sale of these assets were utilized to lower debt
and make share repurchases. Notably, the company remains on track
to improve leverage as it targets a leverage ratio of about 3.5 by
the end of 2019.
That said, we expect Newell’s robust Transformation Plan to address
hurdles and position it for growth. Currently, the company carries
Zacks Rank #3 (Hold).
3 Better-Ranked Consumer Staples Stocks
General Mills, Inc. GIS delivered average trailing four-quarter
positive earnings surprise of 11.1%. It currently sports a Zacks
Rank #1 (Strong Buy). You can see the complete list of
today’s Zacks #1 Rank stocks here.
Colgate-Palmolive Company CL outpaced earnings estimates in the
trailing four quarters, the average surprise being 0.7%. The
company presently has a Zacks Rank #2 (Buy).
Medifast, Inc. MED, also a Zacks Rank #2 stock, pulled off average
positive earnings surprise of 9.1% in the last four quarters.
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