Business has been more than a little bit challenging lately for Blyth
The underlying candle business at Blyth has historically been a sound cash generator, but rapidly rising raw material costs and competition from Yankee Candle Company
For the quarter, the company saw flat sales and net earnings that were down to $0.10 per share versus $0.21 last year. Don't bank on those earnings, either, because all of it came via a tax-related settlement with a state government. Back that one-time item out and you'll find the company broke even for the quarter. And since the one-time item was booked to sales, you'll also find that gross margins and operating margins are actually lower than reported, as well.
Where shareholders have their biggest beef with Blyth is in the company's usage of its free cash flow. As an Income Investor, I love that the company pays a dividend, but I'm lukewarm on the company's history of share repurchases and not impressed with the company's acquisition history. The general method for measuring free cash flow, which is the one that the company uses, is the following:
Operating cash flow - capital expenditures = free cash flow.
In many cases, that formula works. But adjustments need to be made for companies that receive large benefits from stock options or are serial acquirers. Blyth has been on an acquisition binge of sorts the last few years -- a total of $316.2 million in capital has poured out the door over the last four years to fund these acquisitions.
Had these acquisitions created an added boost to free cash flow in current periods, the previous expenditures would leave little room to complain. But it hasn't worked out so neatly. From 2002 to 2005, Blyth poured $316.2 million into numerous acquisitions. The result is that the company is forecasting approximately $100 million in free cash flow this year -- that's before any acquisitions that may or may not happen -- which is only $13.1 million above the $87 million turned in for fiscal 2001, the year before the company began spending large amounts on acquisitions.
The first half of the year for Blyth has been very rough, but this is a business that gets the bulk of its sales, earnings, and cash flow in the second half of the year, which is still to come. According to management, these results should be relatively flat with last year's results. That's an improvement from what Blyth has delivered in the first half, but given all the capital that the company has poured into acquisitions over the last four years, shareholders have the right to expect a stronger performance.
For another candle-illuminated Foolish knickknack, get a whiff of the following: