Newell Loses 22% YTD: Can Its Transformation Plan Aid Stock?

Zacks Equity Research

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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