Helen of Troy - Q4 2024

Transcript

Jack Jancin (Senior VP Corporate Business Development)

Good morning, everyone, and welcome to Helen of Troy’s fourth quarter fiscal 2024 earnings conference call. The agenda for the call this morning is as follows. I’ll begin with a brief discussion of forward-looking statements. Ms. Noel Geoffroy, the Company CEO, will comment on business performance and key accomplishments, and then provide some perspective as we begin the new fiscal year. Then Mr. Brian Grass, the Company CFO, will review the financials in more detail and comment about current trends and expectations for the upcoming fiscal year. Following this, we will take questions you have for us today. 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 words similar 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 Ms. Geoffroy, I would like to inform all interested parties that a copy of today's earnings release has been posted to the Investor Relations section of the company's website at www.helenoftroy.com. The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures.

The release can be obtained by selecting the Investor Relations tab on the company's homepage and then the Press Releases tab. I will now turn the conference call over to Ms. Geoffroy.

Noel Geoffroy (CEO)

Thank you, Jack. Hello, everyone, and thank you for joining us today. Today marks my first public remarks as Helen of Troy's CEO. I'm honored to lead this great organization with an inspiring purpose of elevating lives in moments that matter everywhere, every day, and I am optimistic and energized by what lies ahead for the company. Today we reported fourth quarter results that came in ahead of our expectations. We exceeded the full-year fiscal 2024 consolidated net sales and adjusted EPS outlook we provided in January. During the fiscal year, we expanded gross profit margin by 390 basis points and increased adjusted operating margin by 50 basis points, even as we used fuel generated by Project Pegasus to make incremental strategic investments in our business.

We generated $269 million in free cash flow and strengthened our durable balance sheet by reducing our total debt by $269 million to $665.7 million. I am pleased with the continued execution and consistency of our results, particularly in light of an ongoing difficult macroeconomic environment and the changes that our organization is navigating. Today's results reflect the strength of our brand portfolio, the progress of our strategic initiatives, and the talent and dedication of our associates, all of which provides us with a strong platform to build upon in fiscal 2025 and beyond. During the past fiscal year, we made significant progress on the goals we set for ourselves. I am pleased with the passion and engagement of the entire Helen of Troy team as we continue to embrace our new structure as a true global operating company.

This structure includes next-level centralization of shared services to leverage our functional expertise, our first-ever centralized marketing center of excellence to bring new capability and scale, business units that are even more focused on brand building and consumer-centric innovation, and our newly formed North American Regional Market Organization, or NARMO, which mirrors our international RMO to drive excellent in-market execution. Despite fiscal 2024 being one of the tougher macroeconomic years for discretionary consumer goods, we found a way to deliver our plan while navigating a number of challenges, including inflationary pressures coupled with continued predictions of recession, lengthy COVID hangover effects impacting some of our categories, shifts in shopping patterns between brick and mortar and online, changes in the retailer landscape as they adjusted to consumer spending and shopping dynamics, and the effects of geopolitical events.

We braced for the impacts of these challenges and responded by lowering inventories, reducing costs, leveraging our scale to find new growth opportunities, and keeping a laser focus on ROI with the investment fuel generated by Project Pegasus. Last October, we unveiled Elevate for Growth, our exciting six-year strategic plan that represents an important pivot for the company. The plan emphasizes increased growth investment and a new portfolio management approach with defined criteria to make sharper resource allocation choices based on growth potential and return on investment. We also doubled down on delighting consumers with next-level brand building and innovation. We are striving for consumer obsession in all that we do. We committed to upgrading our data insight and analytic capabilities to solve business issues better and faster to enhance our productivity.

Our new state-of-the-art distribution center in Gallaway, Tennessee, that opened in fiscal 2024 is a great example of that. We did all this while still preserving the company's strong foundation, balance sheet, and long-term investments that we believe will deliver a bright future for all Helen of Troy stakeholders. Before turning to our fourth quarter results, I want to highlight four foundational elements of Elevate for Growth that I spoke about during October's Investor Day. These four elements excite me and give me confidence that we will emerge in a stronger position even as we navigate an environment where we expect consumers will continue to face tough choices when it comes to discretionary spending. First, we have a diversified and well-recognized family of trusted brands with an enviable reputation as a leader across multiple categories and geographies.

Our brands continue to be highly rated by consumers and receive awards and recognition from prestigious periodicals and industry organizations such as Consumer Reports, Wired, Red Dot, Good Housekeeping, beauty publications, Food Network, and Forbes. We believe our strong brands have many opportunities to stretch into attractive adjacent spaces to further excite existing consumers and attract new ones. We identified new opportunities to expand distribution of our brands into incremental channels and customers, and those efforts paid off in fiscal 2024 as we surpassed the internal goals we set for ourselves. For example, at one of our key mass customers, we secured higher-than-expected incremental distribution of our OXO outdoor grilling line and key Revlon hair appliances. We expect to further benefit from a full fiscal year of this new distribution in addition to even more opportunities in fiscal 2025.

Second, we are generating fuel from Project Pegasus to incrementally invest in growth opportunities and capabilities. This will enable us to strategically invest in our brands with precision marketing and further product and commercial innovation. Third, we are advantageously positioned to fully leverage our operational and organizational scale and assets. I am delighted that our team is embracing our new global operating model to enable greater focus and centralized expertise. I am also excited to fully leverage our new state-of-the-art Tennessee distribution center to bring significant new scale and service capabilities that will set us up for years to come. Finally, and most importantly, I am energized as I continue partnering with our talented and exceptional associates to further build on our strong culture. I am proud of our ability to attract, develop, and retain a diverse team.

I believe our culture is a competitive advantage that delivers benefits to all our stakeholders by bringing new perspectives, experiences, and expertise, resulting in great brands that elevate consumers' lives with thoughtful and effective solutions. Turning now to fourth quarter business results. Consolidated net sales increased 1% as we benefited from growth in online, international, club channel sales in home and outdoor, and prestige hair care. These factors were partially offset by declines in air purifiers, fans, and heaters driven by our SKU rationalization efforts and softer consumer demand, and a decline in humidification reflecting cough-cold flu illness below the prior year and pre-COVID historical averages. Adjusted diluted EPS was $2.45, or a 21.9% increase over the same period last year, and also slightly ahead of our expectations.

Overall, macro trends in the quarter reflected a consumer who remained cautious with their money and increasingly prioritized their discretionary spending on travel and other entertainment experiences over tangible goods. As we move into fiscal 2025, we are seeing these trends intensify. Turning now to our segments, home and outdoor net sales increased 5.4% over the prior year period due to growth in the home category, insulated beverageware, packs and travel, and international. OXO remains the number one branded line in the kitchen utensils and canister food storage categories and gained share in kitchen utensils over the last 12-month period. The brand achieved strong results driven by distribution gains in the mass channel, the timing of club promotional programs, as well as strength and new distribution in grocery. International was also a highlight in the quarter.

Be and win where the shopper shops is one of our Elevate for Growth strategic choices. I am pleased to share that our NARMO and home and outdoor teams have collaborated to secure exciting OXO distribution wins. At Walmart, our OXO SoftWorks kitchen gadgets have expanded, we added our grilling line, and we are pleased to gain additional placement for OXO in other key categories later in fiscal 2025. This is notable as 90% of the U.S. population lives within 10 miles of a Walmart store. Hydro Flask performed well online, driven by continued positive reception to our new travel tumbler, seasonal colors and promotions, as well as post-holiday replenishment. We are excited about where we are heading on this key brand. Being consumer-obsessed with Hydro Flask means launching on-trend color, design, style, customization, and personalization options.

In addition, we need to offer different container and cap configurations to meet the needs of various consumer usage occasions, whether in the car, at the gym, in the park, around the house, or at school. We are also evolving our marketing content and targeting with the support of our new marketing center of excellence, allowing us to better connect with our Hydro Flask consumer with the right message in the right place at the right time. You'll see us expand on these concepts with new product offerings such as the new Sugar Crush limited edition available in bottles and travel tumblers featuring a beautiful waterfall of pastel colors, and the new insulated shaker bottle designed with an internal whisk ball perfect for mixing a smoothie or protein shake. You will also see us further expand distribution of Hydro Flask in fiscal 2025.

Osprey sales showed strength internationally with growth in EMEA and APAC on strong demand for travel packs. In North America, we made further inroads in key sporting goods retailers. For fiscal 2024, overall U.S. brand share strengthened for luggage, and we extended our number one position in technical packs. 2024 marks Osprey's 50-year anniversary, and we were honored to be recognized in Outside magazine. Osprey's focus remains on making the world's best packs suited for a wide range of activities, featuring our unique and superior design, craftsmanship, and commitment to sustainability, all backed by our almighty guarantee. Our new collection continues to build on the brand's strengths and heritage, including new designs for different occasions like biking, day packs, and inclusive sizes so everyone can experience the outdoors with the very best gear.

Perfect examples are three new additions to Osprey's Extended Fit line of packs, which became available this spring and are already garnering positive consumer response on social media. Osprey's Farpoint 55 travel pack has also been a hit, achieving 4.6 stars on Amazon out of over 1,300 reviews. We believe Osprey has a bright future ahead, building on its strengths, continuing to extend into new adjacencies, and leveraging the Helen of Troy operational and organizational scale. Switching gears now to our beauty and wellness segment, net sales declined 2.5%, primarily driven by air purifiers, fans, and heaters, reflecting softer consumer demand and our SKU rationalization efforts. We also saw a decline in humidification, reflecting cumulative cough, cold, and flu season illness incidents below the prior year and pre-COVID historical averages.

These factors were partially offset by growth in hair appliances and thermometry, which helped drive overall international sales and growth in prestige hair care. We also benefited from an incremental seven weeks of Curlsmith sales compared to the prior period as we acquired Curlsmith in April 2022. In beauty, online sales for our volumizers strengthened in the quarter, and we also benefited from incremental doors and distribution in the mass channel across our hair tool portfolio. Drybar and Curlsmith prestige continued their momentum driven by their innovation pipeline and marketing support. As one example, our Drybar Hot Roller Club rollers arrived at our key retailers in early February and quickly became a consumer sought-after innovation, making it our best-selling tool in those retailers within weeks. In wellness, the cough, cold, and flu season was below the prior year and pre-COVID historical averages for both our quarter and the fiscal year.

This impacted sales of our products designed to help relieve cough, cold, and congestion symptoms such as humidifiers, inhalants, and related consumables. As mentioned during our January call, we saw a softer start to the season. As the quarter progressed, influenza-like illnesses increased some, and retailers were able to meet this consumer demand with their existing inventory. Therefore, we have not seen incremental replenishment orders so far in Q1 of fiscal 2025. International was a standout in the quarter, posting double-digit growth as we benefited from more focused strategic choices on must-win brands and markets, strengthened distribution and distributor partnerships, and implemented a more integrated organizational structure of our EMEA team. Growth was driven by performance in EMEA with strong demand for both Braun and Revlon. Hydro Flask benefited from our new strategic outdoor sports, lifestyle, and travel initiatives in Europe while leveraging Osprey's European distribution footprint to accelerate growth.

We will continue to prioritize international growth, leveraging the must-win brand and market choices selected in Elevate for Growth. Looking ahead as we face what we believe will be a tough environment of increasingly soft consumer discretionary spending, I am confident that our strategic plan and efforts position us to achieve our fiscal 2025 objectives, which Brian will take you through shortly. In the current business environment, we believe it is imperative that we remain agile, invest incrementally to further strengthen our brands, leverage our organizational structure and scale, and control our controllables. Elevate for Growth and Project Pegasus are about leveraging our organization to unleash its full potential and ensuring that the framework and our associates are fully equipped to keep up with the pace of change. Just last month, I was delighted to attend our new unified NARMO annual sales meetings.

The enthusiasm and power of this event was inspiring. You could feel the optimism, teamwork, and focus towards elevating our brands to deliver our growth goals. Globally, we have an outstanding worldwide organization that is motivated by our purpose and values and excited for our future. Our purpose and values set a high bar, and this will remain the most important element of Helen of Troy. Elevating lives in moments that matter everywhere, every day, is something that matters to all our stakeholders and, importantly, can stand the test of time. I am excited and feel incredibly fortunate to have an exceptional team of determined associates whose dedication and passion will help further elevate our company in this next era. I am confident that the best is yet to come.

Before turning the call over to Brian, I would also like to let the investment community know that at the end of May, Jack Jancin, Senior Vice President of Corporate Business Development, will be retiring after 40 years in the consumer products industry, 20 of them at Helen of Troy. Many of you know Jack from the various events and meetings over the past 10 years. He has been instrumental to increasing Helen of Troy's visibility within the financial community and leading our M&A activities. We are so grateful for his many years of service and contributions and would like to extend our warmest congratulations and best wishes for his future endeavors. I would also like to welcome Sabrina McKee, our new Senior Vice President, Business Development and Investor Relations, who joined us on April 1st. She brings a wealth of experience and fresh perspective to our team.

Many of you also know Anne Rakunas, our Director of External Communications and Investor Relations, who will remain the main point of contact for all investor inquiries. Now I will pass the call over to Brian.

Brian Grass (CFO)

Thank you, Noel. I'm pleased to report fourth quarter results that again exceeded our expectations. We delivered net sales and adjusted EPS ahead of our outlook. We expanded gross profit and adjusted EBITDA margins, and our business continued to generate strong free cash flow. As Noel mentioned, fourth quarter consolidated net sales increased 1% despite unfavorable impacts from SKU rationalization and the bankruptcy of Bed Bath & Beyond, driven by growth from OXO, Hydro Flask, Osprey, Drybar, Braun, Revlon, and Curlsmith. Growth was partially offset by declines in Honeywell, Vicks, PUR, and Hot Tools.

Gross profit margin improved 570 basis points to 49% compared to 43.3% in the same period last year, just slightly above our expectations for the quarter. Year-over-year improvement was due to lower inbound freight and commodity costs, a decrease in inventory reserve expense, lower trade discount and promotional program expense, and a more favorable product mix within beauty and wellness, including the benefits of SKU rationalization. These factors were partially offset by a less favorable customer and product mix within home and outdoor. GAAP operating margin for the quarter was 13.5% compared to 11.1% in the same period last year. On an adjusted basis, operating margin increased 320 basis points to 17%. The increase was driven by the gross profit improvement I just referred to, partially offset by increased marketing investment, higher annual incentive compensation expense, and higher expense associated with the ramp-up of our Tennessee distribution facility.

On a segment basis, home and outdoor adjusted operating margin increased 160 basis points to 18.7%, driven by lower commodity and inbound freight costs, lower trade discount and promotional program expense, and a decrease in inventory reserve expense. These factors were partially offset by higher expense associated with the ramp-up of our Tennessee distribution facility, an increase in annual incentive compensation expense, and a less favorable customer and product mix. Adjusted operating margin for beauty and wellness increased 440 basis points to 15.6%, driven by lower inbound freight, a decrease in inventory reserve expense, lower trade discount and promotional program expense, decreased distribution expense, and a more favorable product mix, including the benefits of SKU Rationalization. These factors were partially offset by an increase in marketing investment and higher annual incentive compensation expense. Net income was $42.7 million or $1.79 per diluted share.

Non-GAAP adjusted diluted EPS grew 21.9% to $2.45 per share, primarily due to higher adjusted operating income in both segments, lower interest expense, higher interest income, and lower shares outstanding, partially offset by an increase in the adjusted effective tax rate. We continued to generate strong cash flow with cash from operations of $73.6 million in the fourth quarter, in line with our expectations. We ended the quarter with total debt of $666 million, a decrease of $269 million compared to fiscal 2023. Our Net Leverage Ratio was two times compared to 2.8 times at the same time last year. Stepping back to look at the full fiscal year, I'm pleased with the consistency of our financial performance and our ability to meet or exceed our full-year outlook commitments, including net sales, Adjusted EBITDA margin, interest expense, Adjusted EPS, Free Cash Flow, and ending Net Leverage Ratio.

I'm also pleased with the improved performance in year-over-year sales and other key measures throughout the course of the year. While full-year consolidated sales declined 3.3%, this included the year-over-year declines from SKU rationalization and the Bed Bath & Beyond bankruptcy of approximately 3.4% combined, and was slightly ahead of our full-year outlook. We improved gross margin by 390 basis points driven by lower inbound freight, SKU rationalization, lower inventory reserve expense, and the favorable comparative impact of EPA compliance costs incurred in the prior year. We improved Adjusted EBITDA margin by 100 basis points despite structural headwinds and lower operating leverage, even as we increased our marketing investment $10 million beyond our original target.

We generated free cash flow of $269.4 million, reaching the high end of our outlook, which helped us beat our original interest expense expectations, make $50 million of share repurchase not included in our original outlook, and still end the year with leverage in line with expectations. Finally, we made progress in our effort to optimize our brand portfolio through a potential divestiture and are actively engaged in a process that we hope to complete in the second quarter of fiscal 2025. The likelihood, timing, and potential impact of the divestiture cannot be reasonably estimated at this time and therefore is not included in our outlook. We will make an announcement when we have more to share, and if the divestiture does occur, we will update our outlook at that time. Fiscal 2025 begins our Elevate for Growth era, which provides our strategic roadmap through fiscal 2030.

We intend to further leverage our operational scale and assets, including our state-of-the-art Tennessee Distribution Center, improve the go-to-market structure with our North American RMO, and our expanded shared service capabilities to grow organic sales, further expand margins, and deploy capital through strategic acquisitions, share repurchases, and capital structure management. Turning to our full-year outlook for fiscal 2025, we have factored in a number of variables, including our view of lingering inflation, interest rates that are higher for longer, lower growth expectations from certain retailers, a softer consumer that is further prioritizing their more limited discretionary spend on experiences and services, and a cough-cold-flu season in line with pre-COVID historical averages. In terms of retail inventory, while we see pockets of higher weeks on hand in some of our categories, we believe retail inventory is healthy overall, and we generally expect sell-in to closely match sell-through.

With the fuel from Pegasus, the operational improvements we've made, and our Elevate for Growth strategies, we believe we are well positioned to navigate what we expect will be a softer consumer spending environment. We expect net sales between $1.965 billion-$2.025 billion in fiscal 2025, which implies a decline of 2% to growth of 1%. In terms of our net sales outlook by segment, we expect home and outdoor growth of 1%-4% and a beauty and wellness decline of 4.5%-1.5%, which includes a year-over-year headwind of approximately 1% related to the expiration of an out-licensed relationship of one of our wellness brands. We expect GAAP diluted EPS of $6.68-$7.45 for the full year, and non-GAAP adjusted diluted EPS in the range of $8.70-$9.20, which implies an adjusted diluted EPS decline of 2.4% to growth of 3.3%.

We expect Adjusted EBITDA margins to decline roughly 40 basis points as benefits from Pegasus and other gross profit improvements are reinvested for growth. We see the current softness in the environment as an opportunity to further invest in the health of our brands and grow our market share. As such, our outlook reflects a year-over-year increase in growth investment spending of roughly 100 basis points on top of an increase of 100 basis points in fiscal 2024. Our Adjusted EBITDA outlook also includes a year-over-year headwind of approximately 50 basis points from the expiration of the out-licensed relationship I referred to earlier, and some expected margin compression from enterprise technology initiatives included in the Elevate for Growth strategic plan that are beginning in fiscal 2025.

In terms of Project Pegasus, we have updated our expectations to reflect the choices we are making to maximize the benefits of these initiatives while minimizing the transitional risk. We are maintaining the total estimated savings of $75 million-$85 million over the duration of the plan, but have revised the cadence of estimated savings recognition, now extending into fiscal 2027. After achieving our fiscal 2024 Pegasus targets, we now expect the savings in fiscal 2025 to be approximately 35% of the total, and the balance of savings to fall across fiscal 2026 and 2027. We are also lowering the total estimated restructuring charges by $10 million. We now expect one-time pre-tax restructuring charges of approximately $50 million-$55 million over the duration of the plan compared to our previous estimate of $60 million-$65 million. We continue to expect restructuring charges to be completed during fiscal 2025.

We expect a GAAP effective tax rate range of 19%-21% for the full fiscal year, and a non-GAAP adjusted tax rate range of 17.2%-18.3%. We expect capital and intangible asset expenditures of between $30 million-$35 million for fiscal 2025, which includes remaining equipment and technology of approximately $8 million associated with our new Tennessee distribution facility, and initial capital expenditures related to the first phase of enterprise technology initiatives I referred to earlier. We expect free cash flow in the range of $255 million-$275 million, and Adjusted EBITDA of $324 million-$331 million. Net Leverage Ratio, as defined in our credit agreement, is expected to be between 1.25x and 1x by the end of fiscal 2025.

In terms of quarterly cadence of sales, we expect a decline of approximately 7%-5% in the first quarter of fiscal 2025, and a range of flat to 3% growth for each of the remaining quarters. We expect a slight decline in adjusted EPS for the first half of fiscal 2025, with a decline of approximately 15%-20% in the first quarter, and nearly offsetting growth in the second quarter. We expect adjusted EPS in the range of flat to 5% growth in the second half of fiscal 2025. In summary, we're pleased to provide an outlook with both net sales and adjusted EPS growth at the high end of our range, further implied gross margin expansion, a significant increase in growth investment, strong free cash flow, further balance sheet productivity, and capital deployment optionality.

Our free cash flow outlook at the high end of the range implies a forward free cash flow yield of 11.6% using Monday's market capitalization. Our adjusted EBITDA outlook at the high end of the range implies an EV to forward EBITDA multiple of 9.1x using Monday's market capitalization and our outstanding debt at the end of fiscal 2024. We believe these are compelling metrics with strong underlying business fundamentals that compare favorably with our peer set and the market overall. And finally, I want to close by recognizing and congratulating Jack Jancin on his retirement after a distinguished career. I've been fortunate to work with Jack for almost 20 years now and have long admired his wisdom, leadership, charm, and sense of humor.

His contributions to Helen of Troy are immeasurable, and he will be missed, but I'm happy for him and all the boats he will soon meet. Jack, I can only hope that you're better at retirement than I was. And with that, I'll turn it back to the operator for questions.

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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from a line of Peter Grom with UBS. Please proceed with your question.

Peter Grom (Equity Research Analyst)

Thanks, operator. Good morning, everyone. Maybe just to start, Jack, thank you so much for all the help over the years, and we wish you nothing but the best of luck moving forward. Maybe just turning to the questions here, and I guess I have a couple of questions about the 2025 outlook just in the context of what was outlined at the investor day. I totally understand that this was never supposed to be or never considered to be guidance. Just going back to that slide that shows the tailwinds or the building blocks of growth, there was a lot that was really expected to break your way this year. Can you maybe just help us understand what's really changed versus October?

Then just maybe a follow-up to that, just kind of we'd love some perspective on the degree of comfort you have in the guidance at this point, right? It's not lost on many of those listening that oftentimes it's a management transition. Sometimes the outlook can embed a bit more flexibility. So just in the context of the phasing that seems to imply an improvement following a challenging Q1, can you maybe just discuss your comfort or visibility that this outlook is achievable, just kind of given the operating backdrop? Thanks.

Brian Grass (CFO)

Okay, Peter, it's Brian, and I'm going to start, and Noel can build. I'd say, look, let's take this in sequence. Let's start with Q1, and then we can talk about the whole year and the factors that are there the whole year, and then I'll go into what gives us confidence that we can hit that outlook. With respect to Q1, we now know how the cough-cold-flu season played out. We did not know that when we had investor day in October. Based on the way it's played out, we are expecting reduced replenishment orders in Q1, and that's what we've seen so far versus the same period last year when there was a stronger season and it drove solid replenishment in Q1 of last year.

We've also seen pockets of higher inventory in the outdoor channel, both domestically and internationally, and so it will take a period of time to work through that inventory. And then we have seen some speed bumps in shipments during Q1 resulting from the system integration of PearlSmith and certain other DTC platform enhancements, but we believe we're largely past those speed bumps now. And then some additional factors that impact the full year. Again, a lot of these we were not aware of in October. We've shared, and other manufacturers and retailers have also cited an increasingly soft consumer environment. That was really a bit of a change versus what we saw in October. And hopefully, you've also seen lower growth expectations from certain retailers like Ulta, Amazon, Target, which have all come out with recent reports.

We also had an expiration of an out-licensed relationship on one of our brands that we licensed a trademark to in exchange for royalty income, and that has a meaningful impact on revenue and earnings. It effectively dropped straight to the bottom line with respect to earnings. And again, that is not something we had complete visibility on when we gave investor day long-term guidance. I'm glad you pointed out it was long-term and not fiscal 2025. Long-term guidance in October. And then lastly, what gives us confidence in improvement in kind of the last three quarters of the year? We know we have incremental distribution that will layer in throughout the year and will actually build. So it's kind of building layers of distribution throughout the year. In terms of absolute marketing spend, Q1 is our lowest level of spend.

We anticipate the benefit of that incremental investment will accelerate over the course of the year. So there will be more spend over the course of the year, which will drive, we believe, more volume. We're doing repositioning on key brands like Hydro Flask and Drybar, but that is still early on, and it will take time to build momentum behind those efforts. Then we have new product innovation and refreshes weighted to quarters two through four. So those will layer in later in the quarter. Then again, we saw speed bumps in shipments in Q1 as a result of system work that we were doing that we don't expect in the later quarters. So that's kind of the high-level summary of our entire fiscal 2025 outlook with a little bit of comparison to what we saw in October versus what we're seeing now.

Peter Grom (Equity Research Analyst)

That's really helpful. I'll pass it on. Oh, sorry. Go ahead, Noel.

Noel Geoffroy (CEO)

No, I was just going to say I think Brian covered it well. I think I feel, especially in the last few levers that Brian pointed out on kind of why better the rest of the year, I feel a good degree of confidence on the incremental distribution in particular. Those are areas where you have ongoing customer-retailer conversations. You look at their planogram timings, etc. So things can change as the year goes along, but visibility to those things are solid, in my view.

Peter Grom (Equity Research Analyst)

Great. Thank you so much. I'll pass it on.

Noel Geoffroy (CEO)

Thank you.

Operator (participant)

Our next question comes from a line of Rupesh Parikh with Oppenheimer. Please proceed with your question.

Rupesh Parikh (Managing Director and Senior Analyst)

Good morning. Thanks for taking my question. Also, Jack, congrats and best wishes on retirement. Just starting out with, I guess, the competitive promotional backdrop, we'd just love to hear the latest you guys are seeing on the competitive promotional front and then your expectations this year just on the promotional backdrop.

Brian Grass (CFO)

Yeah, I could start again. I mean, Q4, we actually had less promotional expense. But going into next year with the softer consumer, yes, I think it's reasonable to expect that you could have pressure in terms of promotion and how the competitive dynamic will play out. I mean, I think at this point in time, we feel comfortable with how we're positioned, and we've made some adjustments, honestly, to position ourselves well and don't see a significant headwind. But again, that's one where the consumer or the customer competitive dynamics could change during the year, and we'll have to adjust. I don't know if you want to add.

Noel Geoffroy (CEO)

Yeah, I don't see major shifts right now. We continue to watch. We continue to pay attention to what's out there. As Brian mentioned, we made a few select adjustments on some of our Hydro Flask items as we looked across our assortment and some of the competitive assortment and found a few places that we thought we could be a bit sharper. But I don't see major other changes unless dynamics kind of evolve over the course of the year.

Rupesh Parikh (Managing Director and Senior Analyst)

Then I guess my follow-up question, this past fiscal year, very strong gross margin improvement. Is there any color you can just share in terms of gross margin expectations and the key puts and takes we should be thinking about on the gross margin line?

Brian Grass (CFO)

Yeah, I can give you some color. We're trying not to guide to specific gross profit guidance for fiscal 2025, but implied in our outlook is gross margin expansion, and you can understand the extent of it if you consider that we have a drag of 100 basis points related to we called out in the earnings release how we have the drags of 100 basis points on increased marketing investment or growth investment, and then we have a 50 basis point compression coming from the loss of the out-licensed relationship. And then overall, our Adjusted EBITDA margin is contracting only 40 basis points. So we're having at least expansion of 110 basis points implied through those comments. Again, we're not doing specifics with respect to gross margin, but hopefully, you get some idea of the dimensionality of the gross margin expansion for fiscal 2025.

Rupesh Parikh (Managing Director and Senior Analyst)

Great. Thank you, I'll pass it on.

Operator (participant)

Our next question comes from a line of Robert Labick with CJS Securities. Please proceed with your question.

Justin Nunn (Analyst)

Hi, this is Justin Nunn for Robert. So going back to the analyst day, one of the messages or key messages in our view was your ability to ratchet investment spending up and down depending on the macro environment and other factors to achieve a steady bottom line growth. So given the revenue outlook that you've laid out this morning, why do you think fiscal 2025 is the right time to ramp up growth investment spending by 100 basis points in addition to the incremental spend included in your Elevate for Growth plans?

Noel Geoffroy (CEO)

Yeah, I think as we looked at our brands and the need to be top of mind, build top of mind awareness, be available where our key shoppers are shopping, we needed to put some investment. I mean, in my view, now's the time. In these kind of trough consumer environments, these are the moments when you need to really invest in the strength of your brands. And so the 100 basis points investment comes out of the fuel from Project Pegasus, and we will use the new portfolio strategy that we laid out. So we'll lean into those brands and invest in the areas that we think the ROI is very good. We'll adjust throughout the year based on how the return on investment is playing out, how the responsiveness of the brands are playing out.

But we believe this is the right time to invest in the strength and the health of our brands.

Brian Grass (CFO)

Yeah. The other thing I would add is there are less Pegasus savings expected for fiscal 2025 that did factor into kind of the algorithm. With less savings, there's more compression. I agree with Noel, now is the right time to do it. We get a little leakage in terms of EPS, but again, the right thing to do. We have no concerns about our ability to ultimately achieve the Pegasus savings. We'll just come a little bit later. It's really tied to a piece of technology development that is taking a little bit longer to get that developed and in place, but we're comfortable that we're going to get there.

Justin Nunn (Analyst)

I appreciate the additional color there. Then one more follow-up. Your guidance calls for healthy cash flow generation and your target leverage of 1.25-1 at the end of the year. I assume that's exclusive of any potential buybacks. Then along those lines, could you talk about your willingness to be opportunistic and aggressive repurchasing shares, particularly in light of this modest leverage and possible share price weakness this morning?

Brian Grass (CFO)

Yes, that's correct, that our outlook does not include the impact of any share repurchase. I would say our mindset is that we're open to buy with respect to capital deployment, which would include share repurchase. We're looking at acquisitions as well. I think we are in a position, balance sheet-wise, where we're interested in deploying capital.

Justin Nunn (Analyst)

All right. I appreciate you taking the questions. Thank you.

Operator (participant)

Our next question comes from a line of Linda Bolton Weiser with D.A. Davidson. Please proceed with your question.

Linda Weiser (Managing Director)

Yes, hi. So can you talk about just the beauty area? I think you said that Hot Tools was down in FY 2024, and yet you had the consumables launch that would have helped that brand. So can you talk about that a little bit more? And is the consumables now ending the exclusivity at Ulta, so will you be expanding it? And then I thought you said beauty was up in the fourth quarter. So kind of what were the roots of the beauty being up in the fourth quarter, if I caught that correctly? Thank you.

Brian Grass (CFO)

Hi, Linda. It's Brian. I want to start because I want to clarify. We called out Hot Tools being down in the quarter, but it was up for the full fiscal year. So I just want to get that clear. And I don't know if you want to.

Noel Geoffroy (CEO)

Yeah. And I think driven by, as you pointed out, Linda, the launch of the liquids in addition to the tools drove Hot Tools up for the year. And I think in terms of that line, it does continue to be at Ulta. We did continue to work with them to expand some of the end caps, etc., on the Hot Tools liquids. And we are now looking to expand that further into other retail customers. In terms of broader hair tools, I think I maintain a consumer-centric innovation across our portfolio of brands. We have Revlon, Hot Tools, Drybar, and now Curlsmith. So we really hit that good, better, best, which is a great position to be in in a world of kind of the current consumer environment. We can meet the full range of consumer needs. Revlon offers consumers that great value.

Our Revlon Volumizer is still the number one hot air styling tool in the market. It's a price point that's much more accessible. Plus, we have a whole range of other appliances that have done well for us in mass retailers in particular. And then on the higher end, I mentioned in my remarks one of our newest innovations, the Drybar Roller Club. The hot rollers have done well for us. We just launched them in February, and it's already become our top-selling tool in some of the beauty retailers. So it's a good example of how when you meet the range of needs with the range of brands that you have, you can cover the market and start to get the right momentum going.

Linda Weiser (Managing Director)

Thanks. And then in terms of you referred to some speed bumps that affected shipping in the fiscal first quarter. It sounds like they were very specific things. Is there any way to quantify the speed bump impact on revenue in the first quarter of 2025? And then is any of that revenue just delayed revenue, or is it completely lost due to these speed bumps that you had in shipments in first quarter?

Brian Grass (CFO)

Yeah, Linda, I mean, we still work through system things. I don't think it would make a lot of sense to try and be so precise in terms of quantification. But yes, we were specific, and it was isolated to two or three areas where in Curlsmith, we are integrating that business into our ERP system and are effectively done with that integration. We're working out the kinks right now. But as we went through that, we did get some speed bumps in terms of shipments. And I would say at this point in time, our view is that we probably won't recapture those shipments. So I would say retailers will buy back what they need, but they're not going to overbuy and kind of recoup what we weren't able to ship in the first quarter.

And then in the DTC, you probably are aware of the brands where we have the highest DTC presence. We upgraded the platform in one of our businesses and, again, working through things there and likely won't recoup lost volume there. And then the other business was really just instituting changes and enhancements. It wasn't really a platform upgrade, but as we continue to evolve and put new features in, constant maintenance and attention is required. And we saw some declines there. So hopefully, that gives you what you need. It's a combination of probably it goes across three different brands and not something that we expect to recoup, but we expect robust volume from our DTC platforms going forward. That's why we do the enhancements.

And so maybe there's a little bit of lift later because we have those in place now, but not a recoupment of the shipments we lost specifically in the first quarter.

Linda Weiser (Managing Director)

Thanks. Then finally, in terms of, you seem very excited about the distribution expansions that you are getting in FY 2025. Can you quantify how much of the revenue growth you're guiding to is pipeline fill? And then how do you comp that in FY 2026? I know this is looking at a long time, but if the pipeline fill is a significant contributor, do you expect to get more shelf space gains going out, and do you have visibility on that? Thanks.

Noel Geoffroy (CEO)

Yeah. I would say going after—as you probably remember from the investor data—going after white space distribution opportunities has been a key priority as we formed the North American RMO. We were pleased with some progress that we made in 2024. We kind of set an internal goal for ourselves as this was a new organization and exceeded that. Some of that was some of the comments that I made in the remarks around OXO Softworks, Gadgets, and OXO Grilling, and Walmart are two nice examples there. So we got some in 2024. We've got a positive outlook for some additional opportunities in fiscal 2025. And I think it'll be an ongoing area that we continue to go after year in and year out. That's part of the beauty of the North American RMO, where that becomes their focus.

If it's not getting a whole new brand into distribution, sometimes it's just getting the right assortment in there. You're looking at A SKUs, B SKUs, and really making sure you've got your highest velocity, high turning SKUs in the best retailers at the best time. So I don't think it's we get it, and then it all goes away. I think in my experience, that's an ongoing activity that the North American RMO will be going after year in and year out.

Brian Grass (CFO)

And I agree with everything Noel said, but I think it does when it does layer in the first time, like in the second, third, and fourth quarters, will cause some lumpiness compared to the first quarter, which is part of the reason why we have the cadence that we do with respect to sales in fiscal 2025. But what we've seen with our new distribution that we had in fiscal 2024 is strong replenishment, strong results. So we don't see it as a kind of you fill it in and then don't get the repeat business. We've been able to, in some cases, expand the business where we've added these layers of distribution. So we think it's a good, sustainable, long-term growth strategy we plan to continue to use.

Then just on your last point, I think it'd be premature to talk about the visibility and the drivers of this in fiscal year 2026. We're really not to the point where we do that. Now, obviously, if we get the sell through, we get the benefits of everything we do in fiscal 2025, but I think it's premature to talk about 2026.

Linda Weiser (Managing Director)

Okay. Then my final question is on M&A. You're talking about looking at a potential acquisition. It just seems like with Curlsmith integration issues and all the moving parts going on and other execution issues, it just seems not wise to me to be adding more onto the plate with another acquisition. And I think before you had said you might actually do an acquisition before the divestiture. Is that still the case? And are you seeing the M&A valuation so attractive that that's what's making you seem very agreeable to doing another deal? Thanks.

Brian Grass (CFO)

Yep. First, let me say M&A processes evolve. So you can have a point of view at one period of time that completely changes the next period of time. We're not going to lock ourselves into an acquisition that doesn't make sense just because we talked about being in the market for acquisitions. So yes, we did talk about one before. Things change, and we have to adjust. Yes, I think valuations are at a good point. We see this as an opportunity to buy attractive assets at reasonable valuations. So we think it makes sense. Then with respect to Curlsmith, we called it out because it had an impact on shipments. But I think you have to have the perspective of when people do systems integrations, there can often be very big problems. These were not very big problems.

These were minor hiccups in the ability to ship, and it's very complicated integrations that have to occur. This, I actually would view as a success. It has a slight impact on Q1, but our integration of Curlsmith was largely successful. And so I would not see it as a reason to not do further acquisition.

Linda Weiser (Managing Director)

Okay. Thank you very much. I appreciate it.

Operator (participant)

Our next question comes from a line of Olivia Tong with Raymond James. Please proceed with your question.

Olivia Tong (Managing Director and Senior Analyst)

Great. Thank you. Congrats, Jack, on your retirement. Best of luck with everything, and great working with you.

Jack Jancin (Senior VP Corporate Business Development)

Thank you.

Olivia Tong (Managing Director and Senior Analyst)

I wanted to focus my questions more on your Q2 to Q4 expectations. I'm hoping you can provide additional color on the building blocks to drive the improvement in revenue because we obviously hear all the debate around consumer slowdown, seeing increasing signs of that. So what would be driving retailers to increase your distribution if the macros are not in favor? And let me leave it there, and then I'll ask my next question.

Noel Geoffroy (CEO)

Yeah. I think the drivers that we see, the first, and you just touched on Olivia, is the further incremental distribution later in the year. I think in the case of some of the opportunities we have, we have some really strong brands with strong consumer appeal that aren't in some retailers. They're excited and anxious to get our brands on their shelves and in distribution. So we feel good about it. I think the one that we shared is OXO Softworks and Walmart. I mean, that's one where Walmart's really pleased to have, I think, the brand on the shelf. It's a leading brand and one that their shoppers were looking for. So I feel confident and very good about those opportunities. The other one we talked about is the incremental marketing investment.

We talked about building kind of the first-ever marketing center of excellence within Helen of Troy. That team is now partnering with our business unit brand teams to upgrade our creative, upgrade our full funnel experience plans, and investing incrementally behind it so that we can drive even more interest, awareness, desire for our brands. And then I think the repositioning on a few of the key brands is also important to point out. If you look at Hydro Flask, and I talked quite a bit about that in the prepared remarks, some of the new items like the Sugar Crush that just came out, getting a lot of positive traction for new innovation like that that's very appealing and investing behind that so that we get the word out of some of these new items that are very desirable. The Drybar hot rollers is another example of that.

So when you put those innovations out, you've got to spend the marketing behind them to drive that awareness, the desire, the purchase of those items. So those are the areas that we're excited about in the back half. They are a little bit more quarter two through four weighted than quarter one, as Brian and I shared. And those are the things that give me strong confidence for us in that year to go.

Olivia Tong (Managing Director and Senior Analyst)

Got it. Thanks. Maybe I can ask a little bit about any divergence you're seeing between performance in the more premium end of your portfolio versus the mid-price, specifically more around beauty appliances. Obviously, we've heard some commentary out of a key retailer. Are you seeing a similar divergence in terms of performance, or is your outlook more reflective of what they're saying and an expectation that that's going to happen even if you haven't seen it so far?

Noel Geoffroy (CEO)

Yeah. What I would say in Hair Tools is, again, what I really like about our portfolio is that we cover the range. We have that good, better, best Revlon, Hot Tools, Drybar, and Curlsmith at the high end. So wherever the consumer is, we have an opportunity to be there with the right kind of assortment, price point, retailer channel, etc., to meet those needs. So I would say we had good performance at sort of the Revlon entry point end with some new broadened distribution in mass of kind of those opening price point hair dryers, straighteners. There's a perfect match, Essential Hair Dryer, for example, at more of a $25 price point that's doing well. The DryMax hair dryer at a below $40 price point. Those sorts of tools that are resonating well when the consumer's pinched.

But by the same token, as I mentioned, we're also seeing at the high end really strong uptake on the Drybar hot rollers that are a higher price point. So there's pockets of the market that's doing well if the innovation is appealing and the innovation draws them to it. I would say prestige liquids continues to grow. We continue to see that as a strong category. As we've heard with some of the retailers, it's slowing a little bit versus where it was in the most recent few months. But that's an area that we continue to feel strongly about. It's an area that we continue to launch new innovation, whether it's on Curlsmith with a new volume line, new items in Drybar, etc.

I think the key here, to sum it up, is really to have strong innovation across all of the different price points and all of the different channels to meet the various consumers where they are. That's going to be key in this environment.

Olivia Tong (Managing Director and Senior Analyst)

Understood. Thanks so much.

Operator (participant)

Our next question comes from a line of Susan Anderson with Canaccord Genuity. Please proceed with your question.

Susan Anderson (Managing Director and Senior Analyst)

Hi. Good morning. Thanks for taking my question and I want to send my congrats to Jack as well and on your retirement. You're definitely be missed. It was great working with you while you're at Helen of Troy. I guess maybe just to start out on just the outdoor category, I think you mentioned some pockets of higher retail inventory there. Are you seeing that also in some other categories and then in outdoor? I was just curious, is the weakness just across the packs, or are you seeing weakness and maybe higher inventory in other areas as well?

Noel Geoffroy (CEO)

Thanks, Susan. Yeah. I would say retailer inventory is always a function of what's happening from a consumer standpoint. So you can see different adjustments that they make based on how the consumer's purchasing. But the one we called out was in outdoor. And as we looked across both domestically and internationally, we saw a little bit more elevated inventory, not necessarily in our areas per se, but kind of across their entire store inventory, which then reduces their open to buy in our areas and in other areas as they're kind of managing their total inventory levels. Tech packs for us on Osprey is obviously kind of the core of the business. We have a very strong number one position. We extended that number one position over the last year, but the category has slowed versus where it was.

We do see growth in some of the other adjacent categories that Osprey's gone into. So some of the areas like duffels and travel packs and lifestyle packs, etc., show a little bit more growth. But we called out kind of the pocket of inventory in outdoor because we were seeing it both domestically and internationally.

Susan Anderson (Managing Director and Senior Analyst)

Got it. Okay. Great. Thanks. And then I guess maybe just talk about OXO a little bit. It's obviously done very well with a lot of new innovation. I'm curious to hear about what you have coming out this year and then also just the timeline of the Walmart rollout in stores. How should we expect that to flow throughout the year?

Noel Geoffroy (CEO)

Yeah. OXO remains number one in kitchen utensils, canister food storage, some really nice adjacent categories like in coffee, kind of our baby and toddler feeding area. Lots of new products constantly coming out on OXO. It's one of the hallmarks of the brand. In terms of Walmart in particular, the kitchen utensil set has already happened. That's already in market. So you can see that as is grilling. The expansion happened right towards the end of our fiscal 2024. So that's out in stores now. And as I mentioned in my remarks, there's some other OXO categories that we anticipate expanding over the course of 2025.

Susan Anderson (Managing Director and Senior Analyst)

Okay. Great. And then just one last question. So on Hydro Flask, so it sounds like, obviously, tumblers continued to do well. I'm curious just if you see any other, I guess, bottle formats coming out for fiscal 2025 or if you expect kind of the tumblers to be the hot format and, I guess, maybe more of the newness coming from colorways or types of accessories to go with those.

Noel Geoffroy (CEO)

Yeah. I would say on Hydro Flask, tumblers do continue to be where a lot of the growth and where a lot of the energy is as we think about kind of the Gen Z female target that looks at these not only for the functionality but also great design to match their personal style. I do think as a result of what I just said, the colors, like Sugar Crush that we did a limited launch on DTC that moved very, very quickly. We've also got some customer exclusive. There's a Blossom colorway that we've got in partnership with a sporting goods partner of ours. We've got another pastel design in one of our major prestige food partners. So these sorts of things are very interesting to this consumer, right?

They're very willing to purchase multiples if it's a color or design or a special edition that they have to have. And so I think that's going to continue to be an important area. Configurations of shapes, caps, etc., is also going to be important. One of the other ones I mentioned that we've launched that is off to a nice start is the insulated shaker bottle. It's really great for smoothies or protein shakes, etc. That's a new shape that's coming. And I think you can expect to see more configurations and more different formats as we go across the year to meet those different occasions as we've done more work to understand our target, as well as distribution opportunities. This is a brand, as we expand, the target consumer where we need to be where those shoppers are shopping. So that's another opportunity.

And then the personalization customizations, that's also a big part of this category. Our new capability in our facility in Tennessee will only make us better at that. As I said in my remarks, I'm excited about some of the pivots that we're making both in the product innovation, the design, the marketing as we move forward on Hydro Flask. It's one of the other areas I'm excited and confident about in the rest of fiscal 2025.

Susan Anderson (Managing Director and Senior Analyst)

Great. That sounds exciting. Thanks so much. Great. Good luck for the rest of the year.

Noel Geoffroy (CEO)

All right. Thanks so much, everyone. Thank you for your interest and support. We really look forward to speaking with many of you over the coming days and weeks. Thanks for joining us.

Operator (participant)

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.