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Newell (NWL) Slides to 52-Week Low: Soft Margins to Blame?

Zacks

Newell Brands Inc. NWL is trading low due to its long-trend of strained margins. The company’s trimmed outlook for 2018 and an unimpressive second-quarter performance are its added woes. Shares of this Zacks Rank #5 (Strong Sell) touched a 52-week low of $18.61 on Oct 5, closing a bit higher at $18.82.

Additionally, Newell stock has lost 54.6% in a year, much wider than the industry’s 11.5% decline. In fact, the stock’s tepid graph is reflected in its Growth Score of F.

Let’s delve deep.

What’s Hurting the Stock?

Newell has been witnessing strained margins for the past few quarters, despite gains from cost synergies and savings. Absence of earnings related to divested businesses, commodity cost inflation, adverse product mix, and higher advertising, promotion and e-commerce investment have been weighing on margins. Apparently, normalized gross margin contracted 50 basis points (bps) in second-quarter 2018, while operating margin declined 150 bps. Additionally, Newell’s gross margin contracted 120 bps, 420 bps, 100 bps, 20 bps and 410 bps in the first quarter of 2018, fourth, third, second and first quarters of 2017, respectively. Operating margin also fell a respective 190 bps, 290 bps, 40 bps and 250 bps in the first quarter of 2018, fourth, third and first quarters of 2017. However, the metric soared in the second quarter of 2017.

Moving ahead, management anticipates normalized operating margins between 12% and 12.4% in the second half of 2018.

Further, Newell delivered mixed quarterly results, wherein the bottom line outpaced the Zacks Consensus Estimate while top line lagged. Notably, this marked the company’s second consecutive sales miss. Also, earnings declined year over year on lower core sales volume, adverse mix due to lower Writing sales volume and inflation. Sales too fell year over year on account of the new revenue recognition standard and adverse impact of last year’s divestitures. The Baby division’s disrupted business along with a significant inventory destocking in the Writing division’s office superstore and distributive trade channels further hurt the company’s top-line performance.

The company’s recently re-aligned three business segments also witnessed sales decline year over year. Core sales dropped 6.2% mainly due to 14.5% decline in the Learning & Development segment (Writing and Baby) and weakness across the coolers, tents and fresh preserving businesses.

Consequently, net sales are now projected in the band of $8.7-$9 billion for 2018, significantly down from $14.4-$14.8 billion range, guided earlier. Core sales are anticipated to be down low-single digits rate in the third quarter, though it is anticipated to be up low-single digits rate in the fourth quarter. Normalized earnings per share are envisioned in the band of $2.45-$2.65 for 2018, down from earnings per share of $2.65-$2.85. The Zacks Consensus Estimate of 88 cents for the year moved down 1.1% over the last 30 days, clearly reflecting analysts’ pessimism surrounding the stock.

Is There a Silver Lining?

Despite the headwinds, Newell’s Transformation Plan and robust brand portfolio raise hopes of revival. The company has been smoothly progressing with the execution of its Transformation Plan through market share gains, point of sale growth, innovation, e-commerce improvement, and cost-saving plans. Notably, the key aspect of this plan is restructuring the company into a global consumer product entity, valued at more than $9 billion.

In line with its accelerated Transformation Plan, the company has completed the divestiture of The Waddington Group and the Rawlings Sporting Goods Company for gross proceeds of $2.7 billion in the second quarter. Moreover, Newell adds Jostens and Pure Fishing brands to the list of potential divestitures. These divestitures are expected to reshape the company’s portfolio, improve operational efficiency and boost shareholder value.

While Newell’s Transformation Plan is on track, let’s wait and see if this can aid the stock’s momentum any time soon.

Better-Ranked Consumer Staples Stocks

The Chefs' Warehouse, Inc. CHEF has an impressive long-term earnings growth rate of 19% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Archer Daniels Midland Company ADM delivered an average positive earnings surprise of 18.6% in the trailing four quarters. The company carries a Zacks Rank #2 (Buy).

Ollie's Bargain Outlet Holdings, Inc. OLLI is also a Zacks #2 Ranked stock, which has outpaced the earnings estimates by an average of 9% in the preceding four quarters.

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