The woes continue for Tupperware (NYSE:TUP). The struggling seller of kitchenware, cosmetics, and beauty products just reported another quarter of falling earnings and segment realignment. Fools wait for a recovery that always seems to be just over the horizon, but getting paid to wait may be a good strategy -- if the recovery ever happens.
In the flagship Tupperware segment, sales continued to be weak overall, since they were down 3% in Europe (in local currencies). Europe represents almost half of total sales and is by far the company's most profitable region. Weak sales in the U.S. continued, down 10%, after a 12% decline in the first quarter, but rose 7% in the Asia Pacific and Mexico regions.
Earnings were down about 10% for the quarter, depending on whether you look at GAAP results or company-adjusted numbers. On a side note, the quarterly press release contains enough financial charts and reconciliations to make one's head spin. For 2006, management lowered its full-year forecast about 10%, to a range of $1.40-$1.50, for a forward P/E of about 12.
Tupperware's historical track record has been rather anemic. Sales have grown just under 4% annually over the past five years, while earnings have grown a measly 2% annually in that time. Fortunately, the stock sports a hefty dividend yield that is getting even heftier as the stock continues to fall. So investors are getting paid to patiently await a turnaround.
Since Tupperware's cash flow is visible and fairly predictable, it can probably sustain its higher-than-average debt level of close to 70%. But when a debt-to-capital ratio surpasses 50%, I start to worry, since any significant downturn in the business could make it more difficult to make interest payments or repay debt. Plus, it looks like cash fell almost $130 million for the quarter, leaving less of a cushion, though total debt also decreased slightly.
Strong free cash flow levels and a compelling distribution model keep value investors hovering around the stock. Avoiding typical retail channels, Tupperware sells directly to consumers, a practice similar to that of beauty product direct-seller AvonProducts (NYSE:AVP). The model eliminates a layer in the sales process, meaning higher margins and more incentive for the independent sales force.
Tupperware operates in nearly 100 countries outside the U.S., and international sales account for about 75% of the total. Its sales model is especially compelling in markets with lower income levels, because it creates further incentives for the seller. It can also be the only means for product to reach consumers if retail store reach is minimal, which it can be in developing countries.
Tupperware has a number of issues to work through, especially in more mature markets. The problem is that management can't seem to get its operational house in order for consistent sales and earnings growth. Nonetheless, if you're an investor interested in yield -- with the added potential for capital gains -- this may be your stock. There's no telling when operations will improve, but the dividend payment provides cold, hard, quarterly cash flow.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. The Fool has an ironclad disclosure policy . Feel free to email Ryan with feedback or to discuss any companies mentioned further.
