Helen of Troy - Earnings Call - Q3 2026

Transcript

Operator (participant)

Greetings. Welcome to Helen of Troy Ltd, third quarter fiscal 2026 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Anne Rakunas, Director of External Communications. Thank you. You may begin.

Anne Rakunas (Director of External Communications)

Thank you, Operator, and good morning, everyone. Welcome to Helen of Troy's third quarter fiscal 2026 earnings conference call. The agenda for the call this morning is as follows. I will begin with a brief discussion of forward-looking statements. Scott Ezell, our CEO, will then share his thoughts and areas of focus, and Brian Grass, our CFO, will provide an overview of our financial performance in the third quarter and our expectations for the full year fiscal 2026. Following our prepared remarks, we will open up the call for Q&A. This conference call may contain certain forward-looking statements that are based on management's current expectation with respect to future events or financial performance. Generally, the words anticipates, believes, expects, and other similar words are words identifying forward-looking statements.

Forward-looking statements are subject to a number of risks and uncertainties that could cause anticipated results to differ materially from the actual results. This conference call may also include information that may be considered non-GAAP financial information. These non-GAAP measures are not an alternative to GAAP financial information and may be calculated differently than the non-GAAP financial information disclosed by other parties. The company cautions listeners not to place undue reliance on forward-looking statements or non-GAAP information. Before I turn the call over to Scott, I would like to inform all interested parties that a copy of today's earnings release can be found on the investor relations section of the site by scrolling to the bottom of the homepage. The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures. I will now turn the conference call over to Scott.

Thank you, Anne. Good morning and happy New Year, everyone. I appreciate you joining our call. We delivered third quarter results in line with our outlook, reflecting disciplined execution by our global associates who have driven progress towards stabilizing the business despite a challenging external environment. While I'm encouraged by our Q3 progress, we remain fully focused on sharpening our priorities and executing as we fix the fundamentals and improve our performance trends. Recent trends reinforce our view that consumers are being selective.

We continue to see a bifurcated economy, robust spending from high-income households, while lower and middle-income consumers face significant inflation and essentials like rent, food, and insurance, making them increasingly cautious with discretionary purchases. Regardless, we need to win, and I know it's required. We will invest in our brands, we'll invest in innovation, and we'll invest in talent to restore this business to growth.

Some of the initial steps we're taking to restore our business are reflected in a revised outlook for Q4 and the balance of the fiscal year, which Brian will outline shortly. First, I'm energized by the product innovation underway and the upcoming launches in fiscal 2027. We're investing in strengthening brand loyalty through storytelling to deepen our connection with our consumer and advancing our commercial execution capabilities. These initiatives reflect our commitment to consumer engagement, growth, and delivering value for our stakeholders.

Over the past four months, I've visited offices around the globe, spoken with hundreds of associates and customers, conducted comprehensive review of operations, technology capability, financial performance, and external benchmarks. These experiences have given us a fresh perspective, challenging the team to think more critically about long-term value drivers. My biggest takeaway: enthusiasm for our brands is strong. Partners, associates, and customers all want us to win.

These conversations reinforce my commitment to improving how we operate, sharpen our priorities, and amplify our focus on consumers. Building on organizational changes put in place last summer, we've made strides to prepare for success. In October, I outlined four priorities: re-energize our brands and our people, adapting our structure to put the consumer at the center, strengthen the portfolio for predictable growth, improve asset efficiency while maintaining shareholder-friendly policies.

This is informing our direction as we complete our FY 2027 annual planning process and will inform our go-forward strategy. FY 2027 will be the first big step towards our future. More to come in the coming months. As a brand company, we win and lose with the consumer, and growth is our scoreboard. We will make bold choices, embrace new thinking, and learn from past decisions while minimizing disruption.

Our growth priorities are clear: staying true to our North Star, the consumer, invest in brand building and editing and amplifying our focus, and execute with excellence by fully leveraging the talent and skill sets that already exist. By keeping the consumer at the center, we sharpen priorities and move from slow and complex to fast and agile. Teams are untangling complexity to enable faster decision closer to the consumer as we speak.

A growth priority is product innovation. I'm inspired by the passion, commitment, and expertise of our teams. I believe we can drive new product development by better understanding our consumers, allocating resources, and accelerating time to markets. Brands of our size can't do everything, but we must be focused and sharp as we drive separation from our competition. Each business will have a distinct strategy centered on two to three priorities.

Making these tough choices will bring greater clarity to our brands for employees, consumers, and investors. As we reposition the business, we plan to direct resources in a disciplined and targeted manner towards the most impactful opportunities and innovative ideas, allowing them to incubate and take hold. This will both strengthen our portfolio and drive momentum to those products and brands that have the best opportunities for growth, not just for this quarter or next fiscal year, but for the long term as well.

To fund these investments and decisions and position us for long-term sustainable growth, we plan to stay focused on maximizing operational and balance sheet efficiency. A key ingredient of our success will also be the power of our organization to fully leverage talent and skill sets that already exist in the building.

We recently welcomed back a key member of my leadership team to reignite the Power of One. This is the plumbing that enables the work to be done more effectively at Helen of Troy. It's a common language of systems and processes and people. We must balance short-term performance and long-term aspiration. This work starts with my global leadership team and will be cascaded throughout the organization. We will continue to emphasize working capital efficiency and balance sheet health and productivity.

A good example is the recently announced amendment to our credit agreement, which extends the leverage ratio holiday and updates the interest coverage ratio definition. These changes give us greater flexibility to navigate the evolving trade and external landscape. We look forward to sharing our fiscal 2027 outlook in April and plan to outline our long-term growth strategy in the second half of calendar 2026.

And now I'd like to briefly touch on quarterly business segment performance. Overall, net sales outperformed our expectations. Home and outdoor and beauty and wellness sales declined 6.7% and 0.5% respectively, while international sales fell 8.1%. Olive & June continued to outperform our profitability expectations, delivering nearly $38 million in sales. While I am not satisfied with these overall results, I'm encouraged by some of the highlights across our portfolio.

These give me confidence we can learn and replicate across our portfolio and execute. Our ability to grow and capture market share is a product of leadership choices and operational excellence. We plan to be more intentional in our agenda and sharpen our execution. Highlights include we grew Osprey, OXO, and Olive & June. We exceeded Olive & June's internal expectations.

We increased organic D2C revenue by 21%, and we delivered $29 million of free cash flow despite $58 million in tariff drag. Across our portfolio, we're delivering exciting innovation. In the home and outdoor segment, we launched Osprey and Hydro Flask cooler collaboration, combining Osprey's legendary carry technology with Hydro Flask leak-proof insulation for ultimate performance. Osprey also introduced a Mountain-bound series of winter luggage crafted with NanoTough fabric for rugged, highly water-resistant protection for ski and snowboard gear.

Hydro Flask delighted families with the Eric Carle collaboration featuring the iconic Very Hungry Caterpillar in our insulated kids' bottle. OXO expanded its Tot baby-led weaning suite and added a new Tot and coffee SKUs at our Tot partners. This month marks the debut of OXO's Trident Series cookware, which provides superior heat distribution and high-performance cooking without the hassle of a cleanup.

In beauty and wellness, Olive & June continued to introduce trend-right collections tied to holidays and events, including Be Bold collection, Halloween designs, and festive holiday stickers. After quarter-end, Olive & June launched a playful collaboration with Peachybbies, combining nails and slime for the most satisfying collab yet, along with Press-Ons for kids and tweens, which is seeing strong early success at Tot retailers. For cold and flu season, Honeywell introduced two fresh new styled Allergen Plus HEPA-certified air purifiers, a three-in-one for large rooms and a tabletop for smaller spaces.

These innovations, along with many more coming to market, give me increasing confidence we're focused on the right things to improve our business. I believe we can win for our consumer through innovation and marketplace execution. This allows us to return to revenue leadership, strong margins, and robust cash flow. But we know it won't be a straight line. We're making tough choices to invest in our future. We build our platform for growth and improve our financial profile through better operating leverage while we create greater competitive advantage across the portfolio. With that, I'm going to turn it over to Brian to walk through the financial results and outlook.

Brian Grass (CFO)

Thank you, Scott. Good morning, everyone, and happy New Year. Today, we reported third quarter net sales and adjusted EPS results in line with our expectations. I would like to thank our associates for their hard work in achieving our financial objectives for the quarter in what continues to be a challenging environment. Operationally, we made headway on improving our go-to-market effectiveness, leaning in on innovation for more product-driven growth, focusing on the fundamentals and putting our brands back at the center, fully leveraging their unique strengths. Scott mentioned several new innovations in market, and I'm excited by new launches planned for the coming year. There is renewed energy across our organization, reinforced by the culture work Scott mentioned. Our third quarter results reflect progress towards simplifying operations, sharpening priorities, and increasing agility.

But we know much more improvement is needed, and we continue to take decisive steps to position Helen of Troy for sustainable growth. On tariffs, we advanced mitigation strategies, including supplier diversification, SKU prioritization, cost reductions, and price increases. The majority of our price adjustments are now in place, but we are still navigating some parts of the market where we achieve less than full pricing realization due to stop shipments we believe are necessary to support consistent adoption of price increases by our retail partners, primarily impacting the beauty and wellness segment.

We expect some residual impact from stop shipments to carry into the fourth quarter, which I will touch on later in my remarks. Year-to-date, gross unmitigated tariffs had a $31.3 million impact on gross profit, with the full year impact expected to be in the range of $50 million-$55 million. We now expect less than a $30 million tariff impact on operating income for the full year. Net mitigation actions up from our prior expectation of approximately $20 million, primarily driven by delayed timing of pricing realization.

We remain on track to reduce our cost of goods sold subject to China tariffs to between 25% to 30% by the end of fiscal 2026. Our diversification and dual sourcing strategies are reducing long-term supply chain risk and helping to insulate us from further policy changes or other geopolitical impacts. Turning to our results, consolidated net sales decreased 3.4%, favorable to our outlook range and a sequential improvement compared to the first and second quarters of the year. Organic net sales declined 10.8%.

Approximately 3.3 percentage points or $17.3 million of the organic revenue decline was driven by tariff-related revenue disruption, which includes the pause or cancellation of direct import orders from China, changing dynamics within the China market, and the impact of stop shipments referred to earlier. Home and outdoor net sales declined 6.7%. We saw strong demand for travel, technical, and lifestyle packs, strong holiday orders from brick-and-mortar retailers in the home category, and incremental revenue from tariff-related price increases, offset by softness in insulated beverageware, lower online sales in the home category, and lower overall closeout channel sales. Beauty and wellness net sales decreased 0.5%. Organic beauty and wellness sales declined 13.9%, with approximately 4.5 percentage points or $12.9 million driven by tariff-related disruption.

In beauty, hair appliances and prestige liquids were impacted by soft consumer demand, competitive pressures, the cancellation of direct import orders, and lower closeout channel sales. Wellness was unfavorably impacted by lower international sales due to evolving dynamics in the China market, pricing-related stop shipments referred to earlier, and a below-average illness season. These headwinds were partially offset by a strong contribution from Olive & June of $37.7 million. Consolidated gross profit margin decreased 200 basis points to 46.9%, primarily due to the net unfavorable impact of higher tariffs and a less favorable inventory obsolescence impact year-over-year. These factors were partially offset by the favorable impact of Olive & June and lower commodity and product costs exclusive of tariffs.

SG&A ratio increased 160 basis points, primarily due to the acquisition of Olive & June, higher outbound freight, higher annual incentive compensation expense compared to the same period last year, and unfavorable operating leverage. Lower gross profit margin and a higher SG&A ratio resulted in a consolidated adjusted operating margin decrease of 370 basis points to 12.9%, which consisted of a decrease of 650 basis points for home and outdoor and 120 basis points for beauty and wellness.

The declines were driven primarily by the net unfavorable impact of tariffs, higher incentive compensation expense, and unfavorable operating leverage, partially offset by margin accretion from Olive & June in the beauty and wellness segment. We incurred higher interest expense due to higher average borrowings driven by the Olive & June acquisition, higher inventory carrying costs due to tariffs, and a higher CapEx spend as we make supplier transitions out of China.

Higher interest expense was partially offset by lower adjusted income tax expense, resulting in adjusted EPS of $1.71. Inventory ended at $505 million, which includes $35 million in incremental tariff-related costs year-over-year and incremental inventory from the Olive and June acquisition, compared to $451 million at the same time last year. Debt closed at $892 million, with $325 million in revolver availability. Our net leverage ratio was 3.77x compared to 3.54x at the end of the second quarter. The increase in our leverage was due to lower trailing 12-month EBITDA, driven primarily by higher tariff costs and the unfavorable cash flow and balance sheet impacts of tariffs on our outstanding debt balance. Year-to-date, free cash flow was $29 million, which includes $58 million of incremental cash outflows for tariff payments and the cost of supplier transitions out of China.

Now I'd like to turn to our annual outlook. We've tightened our range on the top line to $1.758 billion-$1.773 billion, with home and outdoor net sales of $812 million-$819 million, compared to our previous expectation of $800 million-$819 million, and beauty and wellness net sales of $946 million-$954 million, compared to our previous expectation of $939 million-$961 million. We lowered our adjusted EPS expectations to a range of $3.25-$3.75, driven by less than full pricing realization, consumer trade-down behavior and less favorable mix, higher trade and promotion expense, and the preservation of investments in our people and brands to build revenue momentum and more favorable operating leverage going forward. We expect a full year GAAP SG&A ratio in the range of 38%-40%. We expect a full year adjusted effective tax rate in the range of 13.4%-14.7%.

Inventory is expected to be $475 million-$490 million at year-end, which includes an estimated $39 million of incremental costs from tariffs. Our outlook includes the ongoing impact from changing dynamics in the China market, lapping of tariff-related order pull forward in the fourth quarter of fiscal 2025, and residual stop shipments to support consistent tariff pricing adoption. We expect modest improvements in direct import orders and select programs shifting to warehouse replenishment.

Overall, we expect retailers to continue to closely manage inventories. Despite a recent uptick in flu incidents, overall incidents for the full season and upper respiratory illness in particular are tracking well below both last year and the trailing three-season average. Retailer inventories look to be sufficiently stocked to supply demand should illness continue to increase during the remainder of the fourth quarter.

Given the challenging operating environment, we expect margin pressure to persist through the fourth quarter, reflecting consumer trade-down, a more promotional environment, a delay in achieving full pricing realization, and cautious retail behavior. While we remain focused on cost control, we are preserving key strategic investments in support of our people, new product innovation, stronger brand loyalty, and better commercial execution. As we transition back to growth mode, we expect to have a bias towards revenue improvement over cost reduction in order to recapture our operating leverage.

Before I conclude my remarks, I want to direct your attention to the investor presentation posted to our website, which contains additional information and perspective on our third quarter results and our outlook for the remainder of the year. And with that, I'll turn it back to the operator for Q&A.

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit to one question and one follow-up question and re-queue for additional questions. Our first question is from Rupesh Parikh with Oppenheimer & Co. Please proceed.

Rupesh Parikh (Managing Director of Senior Equity Research Analyst)

Thanks for taking my question. So I guess just going back to some of the top-line trends and the performance of your brands, it was helpful to call out the brands that are actually growing. But just curious, as you look at some of the declining categories, whether it's beverageware, hair appliances, etc., where you are in the process of turning around these brands?

Scott Ezell (CEO)

Good morning, Rupesh. Yeah, thank you. Good question. First, yeah, we are very encouraged by our results on the green shoot brands like Osprey, Olive & June, OXO, Braun, and PUR. They continue to meet and exceed our internal expectations. We have work to do in the areas that you identified, and we are focused on that. Everything from innovation on bringing new products to markets that are in the kitchen or kind of in the lab as we speak, making sure we've got the right Commercial Triangle in place, which is a combination of marketing, operations, and commercial excellence, and then making sure that we're providing the right resources to the right opportunities that are going to create the right value.

o that's our methodical approach. We feel very confident in the work that we're doing. As we said in kind of our prerecorded remarks, is that our performance will improve, but it will not be a straight line. Some of our brands will move at a much faster rate, but the ones that you identified, we're working on aggressively.

Rupesh Parikh (Managing Director of Senior Equity Research Analyst)

Great. And then I guess my follow-up question, just to help frame where we are right now. So as you look at your earnings guidance this year, is there any way to say whether you believe that maybe that's the bottom in earnings power? I don't know if there's any insight at this point in terms of helping us frame how to think about next year and whether we can take this year's guidance as maybe a base to grow upon.

Scott Ezell (CEO)

Yeah, well, I'd say this, and I'm definitely letting Brian opine on it, maybe more specifics. The bottom line is this company's done probably a pretty good job of trying to get its cost structure in place the last several years, but our focus right now needs to be around growth. And that means we got to invest in innovation, brand building, and marketplace excellence in terms of how we execute. And that's what you're going to see we're investing in in quarter four, as well as we talk about our long-range plan, which you'll see the first big steps in FY 2027. It will be about growing the top line responsibly, but growing the top line and making sure our brands are winning, as well as managing against earnings power. Brian, anything to add?

Brian Grass (CFO)

Yeah, just a little bit to say we're shifting our focus to revenue improvement versus cost reduction, and we think the benefit of operating leverage is going to be greater than any benefit we can get from trying to just purely cut costs. That takes a little bit more time, but that's a much more effective and sustainable strategy, and it's going to be better for the long-term health of the business, so we're making a bit of a pivot. Hopefully, you can hear that, and our focus is going to be on revenue improvement and revenue growth first, and then growth and profitability will come after that.

Rupesh Parikh (Managing Director of Senior Equity Research Analyst)

Great. Thank you all for the call. I'll pass it along.

Operator (participant)

Our next question is from Bob Labick with CJS Securities. Please proceed.

Bob Labick (President)

Good morning and happy New Year. Thanks for taking our questions.

Brian Grass (CFO)

Hey, Bob.

Bob Labick (President)

Hey. So one of the focuses, one of the key things you're focused on is the return to consumer-centric innovation. And obviously, you've had that in the past. Maybe was it de-emphasized? Why was it de-emphasized is kind of part of the question. Then the next thing is, how long does that take? And so when should we see that re-emphasis translate into top line? Because as you said, your scorecard's going to be return to revenue growth and the shift back to consumer-centric. How does that play out? What are you actually doing more specifically now than you didn't do last year? And how long does it take to flow through?

Scott Ezell (CEO)

Bob, this is Scott. Good question. I can only give you a headline on the path because I wasn't here. But the bottom line, I've seen companies go through different transitions. Sometimes they think that brands are in a better place than they are, or they can misread the market. I don't know. But I know this going forward, that if I've traveled the globe and I spent time with our teammates and I've analyzed our brands, that we have 30%-40% of our portfolio that has innovation and opportunity to grow faster, we're going to invest in them as we speak. And you'll see the benefits of that in quarter four as well as in FY 2027.

We have a number of our brands in our portfolio that have been underinvested in, have not been organizationally set up for success, have for whatever reason missed the mark on the consumer, that we're working on the renovation steps as we speak to get them in a position to bend the curve. Bend the curve means to stabilize the business as we go into FY 2027 and grow further in FY 2028 and beyond. But the net is we would expect that you're going to see an improvement in our business quarter four on as we go forward, as we come through and talk about our FY 2027 plan. But the key, as Brian said and what I said earlier, is there is a bias towards healthy brands and growing and winning in our categories first and also then delivering value as we do that.

Bob Labick (President)

Okay. Great. And then you talked about a bunch of, I guess, new releases, and I'm looking at the investor presentation right now. Can you maybe focus us on a few of the major releases or milestones of key brands that should be more meaningful than not? So things for us to judge on success next year and not trying to pin you to a quarter for return to growth, but just really what are the kind of big releases that you think should move the needle and we can watch in 2026, calendar 2026?

Scott Ezell (CEO)

Yep. Bob, as you know, I can't speak on a specific future innovation that's not out in public domain. But what I can say is brands like Osprey, Olive & June, Braun, OXO, just like the performance we've had in the most recent quarter, we expect that to continue, and as we funnel resources to these brands that I believe can do a lot more now, you're going to see a lot more acceleration against them. I don't know if I'm really getting to your question of a very specific launch that's happening in the future, but that's how we're focused. I don't know, Brian.

Brian Grass (CFO)

Yeah, I can add a little without getting too specific. I mean, we have things teed up in Hydro Flask that allows us to play, as you and I have talked about, Bob, kind of in the areas where we want to reach the consumer, but we believe it's right for Hydro Flask to play in, and it's not all areas, but we have a strategy there, and we're excited about that. We have some category adjacency plans in Hydro Flask too that we're excited about, and those will be coming out soon. In the brands that Scott didn't mention, where we've got more green shoots, we've got exciting innovation going on there, and that includes PUR, that includes Vicks, and that includes Honeywell, so the point I'd like to make is innovation wasn't lost in all of our businesses and all of our brands.

We had brands that were doing that well, Osprey, OXO, and Olive & June, and some of the others, but it was a little bit lost in some of these other brands that we're talking about. And we have strong plans and strong innovation in the roadmap that is already in the process of being developed. And so it's not like we're starting today on those development plans. They're well underway, and they'll be coming out soon. And it's the accumulation of all of them. There's not one big launch that really does it. It's really making sure that all your businesses have it and have a strong pipeline so that there's no gaps. We just had a little bit too much of gaps in the past.

Bob Labick (President)

Okay. Got it. Thank you very much.

Operator (participant)

Our next question is from Peter Grom with UBS. Please proceed.

Peter Grom (Equity Research Analyst)

Thank you. Good morning, everyone. So two questions for me, and I'll just start with this. But I guess I was just hoping to get some perspective on what you're seeing from a category standpoint. I think there's a lot of cross-currents that are driving the top-line trends that we are seeing in your results. But if you strip out all of the noise, do you have a view on kind of where underlying demand for your categories is trending today? And then I guess just looking ahead, there seems to be some optimism on the U.S. consumer, tax refunds, etc. So just kind of curious, do you think that some of these things could drive some sequential improvement in category demand following what's been a very challenging few years here?

Brian Grass (CFO)

I'll take the first stab, Peter. First of all, absolutely. But I step back from this standpoint that even in the most challenging times, brands that have tight brand proposition, relevant innovation, and connect with the consumer, meeting them when they are, have a way to continue to win. And like brands like Osprey, Olive & June, OXO, Braun, PUR in our portfolio, they will do well in an even better economy or when the consumer's in a better place. The other brands in our portfolio that have not performed where they need to be, they have nothing but upside opportunity to bend the curve through better innovation, more focused storytelling, and an organization setup that enables them to be close to the consumer and execute with excellence, which today we're not doing, and we will do better.

You'll see that a little bit in our outlook on Q4 of why we're not pulling down our revenue. You're also going to see that as you look at FY 2027 on what we expect going forward in terms of improving our performance from a top-line standpoint on a broader range of brands beyond the ones we have today.

Scott Ezell (CEO)

I'd just add, Peter, that I think the question you're asking is a good one, but it's hard to answer. In the moment, there's a lot of things in the market related to higher pricing, price increases, and things like that. The consumer has been resilient up until this point. I think the key is how will they respond to kind of this next phase of inflation and pricing in market, and we'll have to wait and see. But we have plenty of category growth in some of our categories. We have some that are decreasing, but we also have plenty of them that are increasing, and so we're going to lean into that.

Peter Grom (Equity Research Analyst)

No, that's super helpful. Then I guess just to follow up on just kind of the Q4 outlook and just kind of the big divergence on the bottom line versus the prior outlook. Because, Scott, to your point, the sales are kind of in line with your prior outlook. Can you maybe just speak to the moving pieces and where things are playing out differently than what you would have expected? I guess this is maybe asking a repetitious question differently. I know we'll get 2027 guidance in April, but I guess would you say this Q4 dynamic is more one-time in nature, or are there things investors should be extrapolating from this week or exit rate out to next year?

Scott Ezell (CEO)

I'll take the first part and let Brian opine on it. First of all, as you look at Q4, I think of it like kind of a wedge. This is the beginning. We want to invest in our brands for growth. I want the word growth to be a part of what we're about, and it's responsible growth. And what we're doing is we believe that we can grow the top line if we make the investment against new product innovation, better storytelling, getting our organization with the consumer at the center.

We can bend the performance. And you're going to see a little bit of that in Q4, and you'll see a lot more of that. Big steps forward as we go into FY 2027. But as far as outlook long-term, of course, we're not ready to publish that. I don't know if Brian can share any more color or texture to that.

Brian Grass (CFO)

I can give you some good perspective on Q4 and then give you some dimensionality on how to feel about going forward from that. And I just say to tack on to what Scott was saying, our conclusion is more of the same isn't going to get us where we want to go. We've been trying to cut our way to better performance over the last two to three years, and it's not sustainable, and we're at a point where it's going to be very difficult to continue to do that. So we're shifting our focus to revenue improvement versus cost reduction to get better operating leverage. That's going to take more time.

I think in the short term, you're going to see more pressure on the bottom line as we look to lift the top line. Then once the top line is lifting, it makes solving the bottom line much easier and much more healthy. With respect to the fourth quarter in particular, there's a slide, it's Page 14 in the investor presentation, which will give you an illustration. The main driver in the change is really unfavorable pricing realization. In the third quarter is when our pricing was really implemented. Compared to our original expectations, we did not achieve. We've got basically leakage versus what our original expectations were, both in realization of the price increase margin that we wanted to gain and stop shipments that we're in the process of implementing to enforce uniform pricing adoption.

We think that's crucial in getting price increases to stick. They have to be uniformly adopted. Otherwise, it doesn't work. And the other thing I'll note is that pricing leakage drops straight to the bottom line. So it has an outsized impact on the bottom line versus the revenue impact. And so be aware of that. We also built in the expectation of higher consumer trade down because we are seeing that and a less favorable mix. And I mentioned some of this in my remarks. We also assume higher promotional expense and margin compression as we look to tighten up our balance sheet and really get our inventory levels in the right place. And we expect that to occur in the fourth quarter.

And then last point I'd make, or last two points, while we believe overall retail inventory is healthy, there were a couple of areas where we had inventory that was higher than we would have liked. And so we built in the assumption that that's going to rebalance in the fourth quarter. And then the last point is we're preserving key investments in our people, innovation, and brands, and actually want to reinstate some of what we cut in the first three quarters of the year.

And so we're going to make those choices for the fourth quarter so that we can get to this revenue improvement and better operating leverage as we go forward. That's a little bit of, and I would say, look, there's got to be some continuation of investment back into growth as we go to fiscal 2027, but we're not prepared to give you anything specific with respect to fiscal 2027 at this time.

Peter Grom (Equity Research Analyst)

Okay. That's helpful. And lastly, maybe just quickly, a lot of focus on this call around top line, getting these brands back to healthy levels of growth. And so Scott, I'd kind of be curious as you've kind of dug in and started to study this business more over the last several months, is portfolio optimization part of that exercise, or do you kind of see the same opportunity across the entire brand portfolio?

Scott Ezell (CEO)

Yeah, Bob, great question. I'd say this for always. As we do our strategic review, let me back up. I've been here four months. I focused on four areas that I think about the last four months, and one of which, which has been job one, which is kind of how do we get their aspiration looking out to the future, and then what are our big steps in FY 2027? As a part of that process, which we've kicked off in the last 30 days, which you'll see more of it in the coming months, is looking at our portfolio. But fundamentally, as I talked about earlier, we have 30%-40% of our brands that have upside opportunity given investment and given the right focus, and we're going to kind of step down on them, step down in a good way, push them forward.

And then we have a number of brands that we have to evaluate what is the right model going forward, how do we invest, what's the right operating model? There's so much opportunity there. And then like any company, we're always going to be evaluating our portfolio over the next, as we look at our strategic plan, on what brands are best fit and which ones don't. But at this point, I don't have any specific answer on that.

Peter Grom (Equity Research Analyst)

Great. Thank you so much for all the color. I'll pass it on.

Operator (participant)

Our next question is from Susan Anderson with Canaccord Genuity. Please proceed.

Susan Anderson (Managing Director and Senior Analyst)

Hi, good morning. Thanks for taking my question. Maybe just to follow up on the innovation front, I guess I was curious, are there certain areas such as maybe the most underperforming areas that you're going to touch first, or is this something where you're just kind of going to touch all areas of the portfolio? And then in beauty, I guess that industry obviously has seen growth the entire time. So just kind of curious what you think kind of went wrong there and what you need to do to kind of turn Drybar around both on the liquid side and fixture side. And then I'm not sure if I heard, but did you say how Curlsmith performed in the quarter? Thanks.

Scott Ezell (CEO)

Yeah. First of all, yeah, Susan, thank you. From an innovation standpoint, we can't run at every innovation equally. So if we just cannot do that, we've got to be really smart about it. And we have several brands that I would say today can do a lot more, can grow a lot faster with the right level of support. And we're going to make sure as we go into FY 2027 that they get what they need. And then we have a number of brands that I call that are in the phase of renovation that need work. They need work from everything on getting sharp on the consumer, sharp on the product pipeline, sharp on the structure to support the brand in the marketplace. And we're going to do that work.

So as I expect our growth curve going forward to be not a straight line, we're going to have parts of our portfolio growing at a faster rate, and then some parts we're just trying to stabilize as we go into FY 2027. Specifically around beauty, we've got an opportunity. We've got some work to do in that area. And I could tell you this, the team is on it. They've gone through a big reset moment in the last 24 months. FY 2027, we should see some improvement, but it'll be much more around stabilization and clarity of future than being in the green bucket of high growth, which we're getting from things like Olive & June, Osprey, and Braun, etc. I don't know, Brian, if you have anything you want to add.

Brian Grass (CFO)

Yeah. I'd just say on Curlsmith specifically, I mean, we're not giving that level of detail.

Curlsmith didn't have the best quarter in terms of our shipments in the quarter, but I wouldn't say that's indicative of the health of that business.

Susan Anderson (Managing Director and Senior Analyst)

Okay. Great. And then maybe just to follow up, I guess, if you could talk about kind of how you're thinking about your leverage, I guess, where would you like it to go longer term? And I guess, how long do you think it would take you to reach that goal? And then maybe just a follow-up on kind of the portfolio and potentially rationalizing some of it. I guess, do you think there's opportunity there maybe even to help pay down quicker some of your leverage? Thanks.

Scott Ezell (CEO)

Yeah. I'll take the first step, and Brian can step in. In addition to, I know you have growth, which I fundamentally think is a job one for Helen of Troy, and we have that opportunity across our brands. In addition to that, as you'll hear in our plan forward, getting our balance sheet healthy and driving operational efficiency will also be kind of an in tandem strategic priority for us that we're going to be focused on.

I'll let Brian talk more about the leverage ratio, but specifically around the portfolio. I mean, just I've been doing this world of kind of running portfolios of brands for many years and always reevaluating the portfolio short, mid, and long term. I'd say in the short term, we're going to be focused on how do we bend the curve and improve our performance from our Green Brands as well as our Renovation Brands.

I think midterm and long term we'll be looking at what is the right portfolio for Helen of Troy and how does that create the long-term value for the company. We're not in a position today where I'm not holding back right now that I have a specific brand that I'm like, "Oh, it shouldn't be there," because we're doing the hard work of saying, "How do we drive the right strategic plan for the company," and we're just not there yet, but it's definitely something we will be considering, and the question we'll wrestle with as we do the work. Brian, do you have anything you want to add on the leverage ratio piece? Sorry. Go ahead. I'll turn it over to Brian.

Brian Grass (CFO)

Yeah. I'd just say, look, we have a base plan that we feel really good about in terms of our leverage and our ability to bring leverage down. We've got a big opportunity to tighten our balance sheet and make it more productive. We've been working on that, and we're going to double down on that area of focus. You heard some of my comments earlier about inventory. We're going to tighten up our inventory, which will produce a lot of cash, and we're going to put that to work to pay down the debt. We also have some longer-term assets that we can look to monetize, and we can consolidate from three distribution centers to two. That's going to take a little bit of time, but that's on our minds. So I would say that that's the base plan and Plan A that we're kind of working first.

But as Scott said, we're always thinking about the divestiture, and I'll just tell you, we get inbound interest. You asked, is it possible for one of those things to happen? And I will tell you, we get inbound interest on some of our brands on a regular basis. I think our focus is more on the Plan A at this point while we're maybe thinking about and working on the Plan B of the divestiture. The divestiture is very distracting. They take a lot of work, and you can put all that work in and get to the end, and you don't get the value that you're looking for, and you may not be successful.

We have to be very choiceful about the ones that we're going to invest that level of work and time into. And I think Scott needs time to build his growth strategy and really look at this. And then once we've done all that and done that assessment, then I think we're better prepared to say we want to focus on X, Y, or Z. So that's how we think about it.

Susan Anderson (Managing Director and Senior Analyst)

Okay. Great. That was very helpful, you guys. Thanks for all the details. Good luck in the new year.

Brian Grass (CFO)

Thank you.

Scott Ezell (CEO)

Thank you.

Operator (participant)

Our next question is from Olivia Tong with Raymond James. Please proceed.

Olivia Tong (Managing Director and Senior Analyst of Consumer)

Great. Thanks. Good morning and happy new year. Based on the innovations you're planning for next year, do you think you find a revenue rebase in FY 2027, or perhaps when do you think you can omit the commentary around the recovery not being linear? I know it's unlikely you'll provide a lot of building blocks for fiscal 2027, but there are quite a few exogenous issues that hit this year, both on revenue and profitability, most notably, obviously, the tariff hit. So what are the incremental hits that we should be thinking about after tariffs begin to enter the base in the late spring?

Scott Ezell (CEO)

Brian, I'll let you just take it.

Brian Grass (CFO)

Yeah. I mean, Olivia, the first part of your conversation was kind of when do you think we'll inflect on it from a revenue perspective? And I want to address that, and I think Scott can also address a piece of it. But then I think you're also saying, look, you had some exogenous headwinds during the year that you don't necessarily have to repeat as you go into next year. And I would agree with that sentiment. We had a lot of disruption in our revenue related to tariffs and direct imports and China dynamics. That is stabilizing. We still have work to do to ensure that we can recover all of that revenue base as we go into next year. And I'm not making a commitment on that at this point. We're doing the work, and we're trying to recapture all that revenue.

And I think it's no matter what, it's a building block year-over-year because we already know that some of that's back in our base. But whether we can get all of it is still an open question. So I can't tell you to what extent at this point, but it's a work in process. And yeah, the tariff situation is better. I think hopefully what you're hearing from our commentary, though, is that benefit that we're going to get from things like tariff stabilization, and they reduce the rate, and we now have pricing in market, and they're even talking about refunds potentially with the Supreme Court. We want to put that back into the business to make sure that we have steady, consistent, reliable revenue growth.

And then I think the algorithm on the profit improvement comes in, but that's going to take a little bit of time. We're going to focus on revenue first. We get that strong. Everything else kind of takes care of itself, but I don't expect that immediately. We got to get the revenue back first, and then we're going to two-step it to the profitability.

Olivia Tong (Managing Director and Senior Analyst of Consumer)

Got it. Maybe if I could double-click on that about what you think is a potential steady-state operating margin for the company? Do you think you can get back to double-digit margins over time? If so, what sort of needs to happen to get there, and what's your view on timing of that?

Brian Grass (CFO)

Yeah. I do think we can get back to that. But again, hopefully, we're not going to time warp back to margins from three years ago. That's not the way it's going to work. We're going to, as we get to revenue improvement first, then revenue growth, then we'll use the operating leverage to have some kind of an algorithm that delivers on profit growth to a degree, but we're going to over-index on the revenue piece of it.

So I don't want to give you a specific margin at this point, but what I will tell you is once we get back to revenue growth, we will have an algorithm that produces margin expansion. And if it's two points of revenue growth, then it's probably 20 basis points of margin expansion. If it's five points of revenue growth, maybe it's 50 basis points of margin expansion. But just to be clear, that's a couple of steps away. We have to get to revenue improvement first, then consistent revenue growth, then we'll focus on margin expansion.

Susan Anderson (Managing Director and Senior Analyst)

Got it. Thank you.

Operator (participant)

We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks.

Scott Ezell (CEO)

Thank you very much, everyone. With renewed enthusiasm across the company, we're ready to leverage our portfolio and return to sustainable, profitable growth. Our path to our aspiration is becoming clear. This leadership team is determined to show sequential improvement across our business in the coming quarters. We will do this by staying focused on our North Star, which is keeping the consumer at the center of everything we do.

By realigning our Commercial Triangle of product, sales, and marketing, we are reinvigorating brand building and strengthening retail and operation execution. Our teams are energized. We're ready to fully leverage our diverse portfolio of leading brands to get us back to a path to growth. Thank you for participating today. We look forward to speaking with many of you at the ICR Conference and the virtual CJS Conference next week. Have a good day.

Operator (participant)

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.