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Strength in Pet Unit & GPIP to Fuel Spectrum Brands (SPB)

Spectrum Brands Holdings, Inc. SPB has been gaining from product launches, continued strength in the global pet care category and solid performance across all four segments. It is also progressing well with its Global Productivity Improvement Plan (“GPIP”).

Shares of this Zacks Rank #3 (Hold) company have gained 34.5% in a year’s time against the industry’s decline of 14.3%. The consensus estimate for fiscal 2021 earnings per share has moved up 0.8%.

Factors Narrating Spectrum Brands’ Growth Story

Strong momentum in its Global Pet Care business acts as a major growth driver for Spectrum Brands. This along with gains from acquisitions led to sales growth of 6.5% in the segment in third-quarter fiscal 2021, which, in turn, drove growth in the animal category. Robust e-commerce sales along with a spike in demand for aquatics, reptile kits and equipment also contributed to segmental growth. In sync with its Global Productivity Improvement Plan, the pet business is on track with exiting non-core assets and activities to focus on core brands. The company is also on track with its plans to tap the aquatics and reptile space.

It is progressing well with the integration of its newly acquired Omega Sea, which is now part of its Global Pet Care portfolio of aquatic brands. Spectrum Brands is making efforts to strengthen its leadership in the dog chews category via the acquisition of Armitage Pet Care. The move will help it expand the chews business as Armitage is a well-known grocery brand in the U.K. and offers products such as dog chews, cat chews, treats and toys. The pet segment remains poised for growth in 2021, backed by its pipeline of robust innovation and growth strategy.

It also remains focused on GPIP, which aims at improving the company’s operating efficiency and effectiveness, while focusing on consumer insights, and growth-enabling functions, including technology, marketing, and research and development. Management expects savings of $200 million from the plan by the end of fiscal 2022. The savings are likely to be reinvested into the growth initiatives and consumer insights, R&D and marketing across its businesses.

Spectrum Brands delivered year-over-year growth in earnings and sales in the fiscal third quarter. Results gained from higher investments in marketing and advertising along with product launches. Net sales grew 18.1% year over year, with organic sales growth of 12%. Sales also grew 13.8% from third-quarter fiscal 2019. Consequently, management continues to anticipate sales growth in the mid-teens, driven by the favorable impacts of foreign currency. Adjusted EBITDA is likely to be in the mid-teens. It also remains optimistic about fiscal 2021, driven by the positive product demand.


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Headwinds to Overcome

Spectrum Brands has been experiencing elevated freight and raw-material costs, which marred margins in the fiscal third quarter. A rise in advertising and marketing costs as well as elevated incentive and distribution expenses remain concerning. Management expects transportation and commodity costs of $120-$130 million for fiscal 2021.

Bottom Line

We believe that Spectrum Brands is likely to sustain its momentum, driven by robust demand in the pet segment, contributions from GPIP and a positive fiscal 2021 view. Topping it, a VGM Score of A reflects its inherent strength.

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