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Can Newell's Transformation Plan Help Regain Stock Momentum?

Zacks Equity Research

Newell Brands Inc. NWL is grappling with lower core sales coupled with adverse impacts of foreign currency translations, which have been affecting its top line for quite some time. Evidently, the company’s sales lagged the Zacks Consensus Estimate in five of the last six quarters in second-quarter 2019.

Moreover, its earnings and sales fell year over year in the second quarter mainly due to the aforementioned headwinds. This, coupled with a decline in sales across the Food & Appliances and Home & Outdoor Living segments, further weighed on the company’s performance.

Management expects the adverse effects of currency on its results to continue throughout 2019 due to strong U.S. dollar. It expects currency headwinds to hurt the top line by nearly 150 basis points (bps) in 2019 and 100 bps in the third quarter. Further, currency headwinds will continue to mar the company’s gross and operating margins for the aforementioned periods.

Consequently, Newell estimates net sales of $2.42-$2.47 billion along with a core sales decline of 2-4% for third-quarter 2019. It also anticipates normalized operating margin contraction of 100-130 bps to 11.9-12.2%.

 



Driven by these limitations, Newell’s stock has been in the doldrums. Shares of the company have lost 22.3% in a year, wider than the industry’s decline of 11.6%.

Transformation Plan – A Boon

Nevertheless, the stock seems to be picking momentum, with 5.8% gain in the past month, whereas the industry dipped 0.7%. Encouragingly, Newell is smoothly executing on its Accelerated Transformation Plan through market share gains, point-of-sale growth, innovation, e-commerce improvement and cost-saving plans. The key aspects of the Transformation Plan are restructuring the company into a global consumer product entity, valued at more than $9 billion.

As a result, Newell plans to offload non-core businesses that account for nearly 35% of its sales, and utilize $10 billion after-tax proceeds from divestitures and free cash flow to lower debt and make share repurchase. Further, it expects to retain its investment grade rating and an annual dividend payout of 92 cents per share through 2019, targeting 30-35% payout ratio.

The execution of the plan will likely lead to the simplification of the company’s operations, which is likely to reduce the number of manufacturing facilities by 66%, distribution centers by 55%, brands by 45%, number of employees by 39% and reduce above 30 ERP systems to two by the end of 2019. These efforts will likely help it to improve operational performance and enhance shareholder value amid a rapidly changing retail backdrop.

Moreover, Newell is likely to gain from plans to retain the Rubbermaid Commercial Products business, which was earlier classified as held for sale, owing to its solid long-term growth prospects. Management expects this business to be accretive to operating margins, normalized earnings per share and operating cash flow in 2020 and beyond. Reflecting gains from the inclusion of this business, effective from the third quarter, the company raised net sales and operating cash flow guidance for 2019. Net sales are now projected to be $9.1-$9.3 billion versus $8.2-$8.4 billion mentioned earlier. Operating cash flow is projected to be $600-$800 million compared with the previously stated $300-$500 million.

Despite the retention of the Rubbermaid Commercial Products business, the company plans to pursue divestitures of the U.S. Playing Cards, Mapa/Spontex and Quickie businesses. In fact, Newell’s plans to divest underperforming and non-core assets, and simultaneously, make prudent investments in areas with high-growth potential look quite appealing.

The company expects to complete divestitures of these businesses by the end of 2019, generating $675-$775 million of after-tax proceeds. This will mark the completion of its Accelerated Transformation Plan. Proceeds from these divestitures will be used to reduce debt as part of the company’s efforts to strengthen balance sheet and maintain investment grade rating. Apparently, Newell lowered its gross debt by $517 million and net debt by $777 million in the second quarter. Management now estimates to achieve gross debt to an EBITDA leverage ratio of less than 4x by the end of 2019 and roughly 3.5x by the end of 2020.

We expect Newell’s robust Transformation Plan to drive the top line in the long term. Moreover, these efforts are likely to aid in returning the stock to growth trajectory. At present, Newell carries a Zacks Rank #3 (Hold).

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