Yet another company is under attack by a hedge fund looking to shake things up. This time, consumer products company Helen of Troy (NASDAQ:HELE)is being targeted by Sachem Head Capital Management for, among other things, not having enough debt on its balance sheets to pay a dividend, so the financier is looking for the company to consider selling off some of its assets or selling itself.
Helen of Troy is the owner of the OXO brand of housewares as well as a broad portfolio of personal care products that it licenses from Procter & Gamble, Revlon, Unilever, and others. It lost its CEO last month when he abruptly resigned to join a commercial real estate firm (his replacement will assume the role effective March 1). Normally, such surprise exits create turmoil since markets tend to like smooth transitions, but Helen of Troy's stock actually jumped 9% the day after it was announced, and was part of the impetus for Sachem Head to advocate for more change.
But this might not be the time to command a premium price. Personal care products makers Coty went public last year and trades some 25% below its June IPO price of $17.50 per share, while Revlon is down more than 20% from its 52-week high. Estee Lauder has similarly lost 15% of its value and even the well-diversified Procter & Gamble has pulled back 10% from recent highs.
Yet there is some sense to the case Sachem Head is making. It rightly complained about the compensation package bestowed on Helen of Troy's former CEO, which would have caused an understatement of operating earnings by $40 million had he not resigned, and it believes the dearth of debt is causing the business to not be optimized to its fullest potential, leading to a 40% understatement of its true earnings power. It also puts it at a disadvantage to rivals and leaves it incapable of returning excess capital to shareholders. The hedge fund owns approximately 3.7% of Helen of Troy's stock.
Furthermore, by selling some of its business lines -- or the company itself -- it could significantly benefit shareholders, the current climate notwithstanding, and Sachem says it knows of at least one company that management rebuffed when approached about a takeover. It believes others are interested as well.
As they should be. Although there's been criticism of both its corporate governance practices and use of capital, Helen of Troy just reported earnings last month that handily beat analyst expectations on the bottom line and edged them out on top too. Where its reported third-quarter net income of $37.5 million, or $1.16 per share, was lower than the $37.7 million, or $1.18 per share, it notched in the year-ago period, it came in well above analyst forecasts of $1.09 per share. Revenues also beat expectations, coming in at $380.7 million versus estimates of $378.3 million.
The OXO housewares brand fared best, with sales rising more than 10%, while personal care items tumbled almost 6% year over year and could be among the areas Sachem Head seeks to jettison. Despite the hedge fund's complaints, Helen of Troy's stock is up 55% over the past year, a fivefold beat over the 11% gain by the Dow Jones Industrial Average.
Management gave the typically bland response that it's always willing to engage its shareholders, but also says its results show it has a firm hand on the tiller. With the hedge fund breathing down its neck, however, that could mean there's still time yet to climb aboard this ship before it sets sail.
Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.