Spectrum Brands Holdings (SPB 2.48%), the owner of many household name brands including Kwikset, Pfister, Remington, George Foreman, and Black & Decker, received tepid appreciation from shareholders last week. Stock in the consumer goods manufacturer rose roughly 2.5% on Feb. 5 following the release of the organization's fiscal first-quarter 2021 earnings.
Results were exemplary. The company reported a year-over-year top-line increase of 31%, with 28 percentage points of the advance resulting from organic growth. Spectrum booked net income of $72 million, against a loss of $36 million in the first quarter of fiscal 2020. The reaction from investors fits a pattern. Although the "SPB" symbol appreciated by a decent 22% last year, it's lagged many fellow consumer goods tickers that have flourished during COVID-19.
A short-term boost versus durable advantages
Perhaps it's easy to see the company's recent momentum as temporary -- a function of pandemic-buoyed sales. After COVID-19-related supply chain disruptions during the spring and summer of 2020, Spectrum boasted a 17% year over year sales advance in the final quarter of fiscal 2020; that pace accelerated this quarter.
And indeed, management's full-year fiscal 2021 outlook, provided last week, calls for a return to something closer to normal conditions in the form of high-single-digit revenue growth. (I should note, however, that this target represents an upgrade from management's guidance provided in the fourth quarter of 2020 that anticipated fiscal 2021 net sales growth of 3% to 5%.)
Yet Spectrum Brands' performance over the last several quarters reflects its ability to reap the fruit of sustainable advantages built over the last few years. The company's present growth has been fairly evenly distributed among each of its primary segments: hardware and home improvement (HHI), home and personal care (HPC), global pet care (GPC), and home and garden (H&G). As you can see from these titles, Spectrums' brand portfolio is thematically centered around the home; management believes that certain habits consumers acquired during the pandemic will last well beyond the economic recovery phase.
To this point, on the company's earnings call last week, CEO David Maura shared his beliefs that "there is real permanence to wanting to live in [a] more renovated, better home" and that "people are just valuing home and home-based activities." Maura also projected a positive impact from a longer-term trend of millions of people relocating from the north to southern U.S. states. -- a region the company has targeted for retail product distribution and growth.
Spectrum Brands has a more focused portfolio of brands than it did only a couple of years ago, by design. After selling off its auto care, portable lighting, and battery lines to Energizer Holdings in 2019, the company has been able to focus on more promising revenue streams such as its fast-growing global pet care business. Management has vowed in recent quarters to keep acquisitions small and strategically focused.
Spectrum Brands is also a more efficient company today than it was before the pandemic, in part thanks to its "Global Productivity Improvement Program," or GPIP. Management launched the productivity initiative in fiscal 2019 with a goal of achieving $100 million in annual cost savings within 18 to 24 months. Based on initial success in implementing cost savings across procurement, its supply chain, and within general and administrative expense categories, the company recently raised the annual productivity target to $150 million. Management believes Spectrum may hit this annual run rate by the end of the current fiscal year. The GPIP has helped to significantly widen the company's profits. Gross profit margin jumped by 600 basis points in the first quarter of fiscal 2021 against the prior-year period, to 36.9%.
Finally, one of the most subtle investments the company has made -- which I believe may have the most impact on its success -- is a cross-divisional communications operations group tasked with trying to understand from customers how products can be improved. Spectrum has been using the work of this "comm opps" group to inform product design and distribution. According to management, the creation of this group has significantly impacted company culture, elevating the importance of the customer, and CEO Maura predicts that "the numbers [will] follow soon."
Is Spectrum Brands overlooked by investors? At the least, I believe its longer-term potential isn't appreciated. Currently, the consumer discretionary multinational trades at just 15 times forward earnings. For a company with a market capitalization of only $3.5 billion, this is quite a discount to the small-cap Russell 2000 index, which currently sports an average forward price-to-earnings ratio of 34. Investors in search of solid consumer-facing companies with reasonable earnings multiples may want to take a closer look at these modestly priced shares.