Helen of Troy (HELE 0.40%) itself isn't a household name, but consumers are likely to know some of the key brands it sells under, like OXO and Revlon. Since the start of 2022, the stock has been in a deep funk, now down some 40% or so. There are a number of reasons for that, but there's one big one that needs to be watched closely.
A shifting regime at Helen of Troy
Consumer products maker Helen of Troy has a strong portfolio of brands and it is a valuable partner to some of the largest retailers. There's nothing inherently wrong with its business. That said, something changed materially in 2022 that resulted in investors dumping the stock. One of the most notable reasons has been the swift rise in interest rates.
This is a big deal because Helen of Troy's debt included a lot of variable rate exposure. In fact, even after working to reduce its level of variable rate debt, the company had still only managed to peg 75% of its debt to fixed rates by the first quarter of fiscal 2024. That means there's still a meaningful amount of debt that will be affected by future interest rate hikes.
This is no small issue. To put a number on the impact that rising interest rates have had, you need look no further than Helen of Troy's fiscal 2024 first-quarter earnings. Interest expense, which is a line item on the earnings statement, rose from $4.4 million a year ago to roughly $14.1 million. That's up $9.7 million, or more than 220% year over year, despite the fact that the company's absolute debt levels fell, going from around $1.1 billion to $840 million. It's probably not too surprising that its Q1 earnings fell year over year at least partly thanks to higher interest costs.
There are two problems here that investors need to consider. The first is that variable rate debt is resetting to higher rates, which is what that type of debt does. That obviously leads to higher interest costs. But Helen of Troy is also trying to reduce its exposure to variable rate debt, which generally means paying it off and taking on fixed rate debt instead. So a good portion of that year-over-year increase in interest expenses is likely locked in. If rates continue to rise, that will turn out to be a good thing, of course, but it still means there's a heavier lift when it comes to growing earnings.
Helen of Troy is not alone
While Helen of Troy's year-over-year interest rate cost increase is huge, and perhaps a little unusual, the bigger issue here isn't. Higher interest rates are a major headwind for companies of all stripes. And investors need to be on the lookout for problems.
The most obvious issue is variable rate debt. When interest rates were falling, using this type of debt was an easy way to take advantage of the downtrend. However, now that rates are on the rise, that debt has turned into a liability. Equally troublesome today is short-term debt, given that it will have to be rolled over or paid off within the next 12 months or so. Paying off debt can require a large cash outlay while rolling over debt will probably mean higher interest costs.
Meanwhile, shifting into long-term debt is a good way to lock in rates but it comes at a cost. Generally speaking, the longer the debt, the higher the interest rate investors expect to receive. So going from short-term debt to long-term debt means a step up in interest costs. In the near term, that might actually mean paying more in interest costs than would have been the case if variable-rate debt had been retained. The difference, of course, is that the risk inherent in variable-rate debt is reduced. That's a trade-off that a company needs to think about carefully.
Helen of Troy is still in fine financial shape overall, but there are other examples where rapidly rising interest costs have forced companies to make hard choices. For example, B&G Foods (BGS 1.19%) cut its dividend at least partly because of a heavy debt load combined with the climbing interest rate environment. Clearly, this is not an issue that investors can afford to ignore.
Dealing as best it can
Helen of Troy is working to get its balance sheet into what you might consider a more predictable shape as it reduces its variable rate debt exposure. That's the right decision, but it isn't alone in dealing with the headwinds caused by rising rates. If you own Helen of Troy shares, you should monitor its progress, but you might also want to take a look at the interest rate expenses of the other stocks you own, too.
