Newell Brands (NASDAQ:NWL) has been the subject of much public interest and shareholder frustration, with shares falling by more than half over the past two years due to concerns that it bit off more than it could chew with a string of acquisitions.
Last year, activist investors Carl Icahn and Starboard Value became involved, advocating for a break-up of the company and for representation on the board of directors. Newell capitulated by giving up four board seats and announcing a break-up plan that would generate $10 billion in proceeds from asset sales.
One year later, Newell has made progress in its turnaround plan, but the stock has continued to struggle. With the stock price at fresh lows, many investors are wondering if the company can successfully turn itself around.
Newell Brands has parallels to the struggles currently underway at General Electric. Like GE, Newell is a conglomerate which embarked on a series of acquisitions that left it unfocused and over-levered. By the time the activist investors arrived, Newell had over $10 billion in debt.
By 2018, Newell was in bad shape and had to restructure. The company announced a sweeping plan to break-up the company and cut costs in the remaining businesses, including using proceeds from asset sales to pay down debt and buy back stock.
Nearly one year after the break-up plan was announced, Newell has made a lot of progress. The company has already sold 5 major businesses (Waddington, Rawlings, Goody, Pure Fishing, and Jostens) and managed to raise $5.2 billion in sale proceeds. Just as it promised, the company has used the proceeds to reduce its debt load and buy back a lot of stock.
Despite the progress in the break-up plan, shareholders found a reason to be disappointed. On a recent earnings call, the company lowered its estimate of the total proceeds expected from asset sales to ~$8.8 billion, down from the $9 billion it had previously forecasted. The assets just aren't worth as much as the company thought they were, which means less money that can be used to reduce debt and buy back stock. The silver lining is that the remaining asset sales are expected to be completed by the end of 2019.
Newell may be similar to GE in its need to sell assets to reduce debt. Thankfully, Newell is easier split up than GE, allowing the company to more quickly execute its break-up plan. Investors weren't pleased with the reduced outlook for total asset sale proceeds; however, raising over $8 billion in capital is enough to accomplish the company's goals of reducing debt and simplifying the company.
Headwinds, headwinds, and more headwinds
Despite the progress Newell has made on asset sales, its remaining operating businesses have continued to underperform. On the recent Q4 2018 earnings call, management explained the soft financial performance with a seemingly endless list of headwinds.
Newell is divided into three business segments: Food & Appliances, Home & Outdoor Living, and Learning & Development. Each segment faced its own unique headwinds in the quarter.
|Affected Segment||Q4 2018 Revenue YOY||Headwind Cited|
|Food & Appliances||(1.7%)||Heavy discounting in the product category|
|Home & Outdoor Living||(3%)||Weak mall traffic at Yankee Candle stores|
|Learning & Development||(3.2%)||Toys-R-Us bankruptcy|
The company also cited a few headwinds that impacted all segments more broadly and are expected to continue in 2019. Negative impacts from tariffs, foreign exchange rates, commodity prices, and transportation costs are expected to negatively impact 2019 earnings by $200 million.
With all three of Newell's segments reporting revenue declines, it's no wonder that the company disappointed investors with its recent financial performance. Newell provided very specific rationales as to why sales declined, hinting that the short term headwinds will abate at some point. However, with seemingly no bright spots to speak of, it is hard to be optimistic.
Management turnover is a red flag
Companies that successfully pull off a turnaround generally do so with a strong management team at the helm. A somewhat alarming sign at Newell Brands is the departure of at least five senior executives in the past 12 months.
- Chief Operating Officer William Burke
- Newell President Mark Tarchetti
- Chief Financial Officer Ralph Nicoletti
- Chief Development Officer Richard Davies
- Chief Accounting Officer Robert Schmidt
It is unclear if some of the executives were ousted because of the turnaround plan or activist pressure. Some would argue that refreshing the executive team is a good idea because of the need for change and a new strategic direction. However, the volume of departures sends a message of chaos in the executive suite at a time when the company needs strong leadership.
Although the company has made progress in some parts of its turnaround plan, it will be difficult to underwrite a healthy recovery until there is stability in the roster of senior executives. Furthermore, the way management turnover has coincided with deterioration in financial performance suggests that the former executives could be jumping off a sinking ship.
Newell Brands has been hard at work to divest assets, reduce debt, and improve financial performance. However, to date, the company has come up short. Newell has made solid progress on selling assets, but the company revised its expected total proceeds lower. The company has made progress in eliminating costs, but a long list of headwinds has put continued pressure on earnings. To top it off, high turnover of senior executives is a red flag that the leadership isn't confident in the company's future.
At this point, Newell has likely done enough in terms of eliminating debt to avoid a worst case scenario, but merely avoiding a worst case scenario isn't enough to inspire confidence from shareholders.