Helen of Troy (Nasdaq: HELE), based in El Paso, Texas, has been on my radar screen for a while. The stock had been recommended to me several times recently as a wonderful growth story at a bargain price.

The company has clearly established a growth trend in its business, with revenue growth in 30 of the last 32 quarters. Net income has increased in 28 of the 32 quarters. A quick check on the current quote shows the stock trading at around 11 times trailing earnings.

I decided to delve into Helen of Troy's business to see if this stock is as attractive as I've heard. As an exercise in the process of stock evaluation, I'll present both the pros and cons of the investing case. Today, I'll cover the pros, and next week, I'll examine the cons that come with Helen of Troy's risks and weaknesses.

The face of Helen of Troy
Helen of Troy makes and sells brand-name personal-care products, including hair dryers, curling irons, combs, hair accessories, mirrors, body massagers, and foot baths.

The company licenses well-known brand names for its products, the largest being Vidal Sassoon, Revlon, Dr. Scholl's, and the Sunbeam and Oster brands. It also developed its own trade and brand names, including Dazey, Caruso, Karina, Wave Rage, Hot Things, Nandi, and DCNL. It sells primarily through mass-market retailers and pharmacies. Wal-Mart (NYSE: WMT) is, by far, its largest customer, comprising some 23% of total revenues in fiscal 2002. In addition to the retail channels, it markets professional and personal-care products to the beauty salon industry under various proprietary trade names.

A tactical acquisition
In March of 2000, it acquired a 55% ownership interest in Tactica International, which brings you those ubiquitous TV commercials hawking Epil-Stop hair-removal products. A recent TV spot features a guy with gorilla-like back hair; a model magically wipes it away with a cloth. Tactica also sells personal-care and household products under the IGIA brand.

The Tactica acquisition has been a huge boon for Helen of Troy, as Tactica went from contributing $24 million of revenues and an operating loss in fiscal 2001 to over $108 million in revenues and a healthy $11.9 million in operating profit in fiscal 2002.

Pushed mainly by sales growth at Tactica, Helen of Troy has shown tremendous improvement in the midst of a very tough economic environment. For the fiscal year ended February 2002, the company grew sales by 25% to $451.2 million, and net income jumped 69% to $29.2 million, or $1.00 per diluted share. It has delivered on the cash flow front, too, producing $52 million of operating cash flow in fiscal 2002.

Hairy inventory levels
Much of the cash flow improvement can be attributed to the company's focus on cutting down on inventory levels. It needs to keep a lot of inventory on hand; its retail store customer base wants to minimize its own inventory levels and often demands orders in very short time frames. Even so, Helen of Troy has historically had an unhealthy level of inventory. And as you know, high and growing inventory levels represent a universal red flag for investors.

At the end of February 2001, inventories were $118.5 million -- a massive number for a company with only $361 million in annual sales. The Flow Ratio, which is a measure of working capital efficiency, was 3.66 at the fiscal year end of Feb. 28, 2001. Remember, the lower the Flow Ratio, the better a company is at managing working capital. I get a little nervous when Flow Ratio gets up over 2.00. A Flow Ratio that high inevitably translates into horrible cash flow. You can see the evidence on the cash flow statement for fiscal 2001, which shows negative operating cash flow despite $17.3 million in reported earnings caused by using $20 million to fund the increase in inventory levels during the year.

The improvement on this front during fiscal 2002 was impressive. While sales grew 25%, inventories dropped from $118.5 million to $100.3 million, a 15% decline, which contributed $18 million to operating cash flow.

The first quarter of this year was even more impressive. Sales were up 12% year over year; net income was up 44%; and EPS was up 37.5%. Even better, the company continued to squeeze cash out of working capital, with inventory down a whopping 40% to $56 million. With the contributions to working capital of $15 million from the inventory reductions, and $3 million from a reduction in accounts receivable, Helen of Troy generated $24 million in free cash flow during the first quarter. Compare this to the reported $6.6 million in GAAP net income. With all this cash coming in, the balance sheet now looks pretty sweet. Cash on hand swelled to $88 million in the latest quarter, offset by $55 million in long-term debt.

On a roll
Helen of Troy clearly has some momentum right now. This year is off to a strong start, and it is rolling out new products rapidly. At the 2002 International Housewares Show in Chicago in January, it introduced some 50 new products expected to push growth for the rest of the year. These included a line of Vidal Sassoon ionizing hairbrushes and dryers, and a line of foot spas recently added to the Dr. Scholl's lineup.

Tactica is also coming on like gangbusters, and, as part of Helen of Troy, has successfully transitioned from a heavy reliance on direct marketing to a mass-market retailer-based distribution system. Going forward, the more dependable retailer channel is expected to generate 60% of sales, and only 40% will come from direct sales. In addition, Tactica has become less dependent upon its Epil-Stop hair-removal products, as it introduced a slew of new products this year. In the year ahead, Epil-Stop is expected to account for less than half of Tactica's revenues, as opposed to over 75% only a year ago.

Attractive forecasts
Looking ahead to the year ending February 2003, the management team is forecasting 10% to 15% sales growth and 15% to 20% EPS growth, with a full-year target of $1.15 to $1.20. At a current price of just around $11, Helen of Troy trades at about 11 times trailing earnings and 9.5 times projected fiscal 2003 earnings. In short, it appears to have business momentum combined with a cheap stock price.

Next week, we'll look through its regulatory filings for risks and hints of dirt in the company laundry, and then wrap up some final thoughts.

Zeke Ashton has been a long-time contributor to The Motley Fool and was a full-time analyst and writer at TMF for several years. Zeke is also the managing partner of Centaur Capital Partners, LP, a money management firm in Dallas, Texas. Please send your feedback to zashton@centaurcapital.com. The Motley Fool is investors writing for investors.