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Can Newell's (NWL) Transformation Plan Offset Sales Woes?

Newell Brands Inc. NWL has been losing investors’ confidence due to its dismal top-line trend. Lower core sales, foreign currency headwinds and adverse impact from the new revenue recognition standard have been weighing on the company’s sales. Moreover, soft earnings projection for first-quarter and 2019 is disheartening.

Consequently, shares of this Zacks Rank #4 (Sell) have lost 29.4% in the past three months, much wider than the industry’s 3.7% decline.

Newell’s sales lagged the Zacks Consensus Estimate in five of the trailing six quarters, including fourth-quarter 2018. Sales also fell 6% year over year due to a 1.2% dip in core sales, and a decline in sales across all its segments. Unfortunately, the company continues to witness a decline in core sales since the start of 2019, which is worrisome. This might lead to the continuation of the dismal top-line trend in the quarters ahead.

Notably, Newell estimates net sales of $1.66-$1.70 billion for first-quarter 2019, down from $3 billion realized a year ago. Core sales are projected to decline in the 2-4% range. Normalized earnings per share are envisioned in the band of 4-8 cents for the quarter versus 34 cents earned in the year-ago quarter.

For 2019, management projects net sales to be $8.2-$8.4 billion, down from $8.6 billion generated in 2018. Additionally, core sales are expected to decline in low-single digits for the full year. Foreign currency translations are expected to hurt sales by roughly 150 basis points (bps). Further, it envisions normalized earnings of $1.50-$1.65 per share, which was shy of analysts’ expectations.

The Zacks Consensus Estimate of first-quarter and 2019 earnings is pegged at 6 cents and $1.59, mirroring 50% and 13.1% decline, respectively, in the past 30 days.

Transformation Plan Lightens Long-Term View

Despite soft top-line performance and guidance, Newell is smoothly progressing with the execution of the Accelerated Transformation Plan through market share gains, point of sale growth, innovation, e-commerce improvement and cost-saving plans. Notably, the key aspects of the Transformation Plan are restructuring the company into a global consumer product entity, valued at more than $9 billion.

In sync with this initiative, the company plans to offload its non-core businesses that account for nearly 35% of the company’s sales; utilize $10 billion after-tax proceeds from divestitures and free cash flow to lower debt and make share repurchase; as well as retain its investment grade rating and an annual dividend of 92 cents per share through 2019, targeting 30-35% payout ratio.

The execution of the Transformation Plan will lead to simplification of the company’s operations, which is likely to reduce the company’s number of manufacturing facilities by 66%, distribution centers by 55%, brands by 45%, number of employees by 39% as well as lower above 30 ERP systems to two by the end of 2019. Management will also focus on right-sizing the cost structure for anticipated smaller net sales, remove stranded corporate expenses and recover the synergies lost through the divestitures.

Further, it is imperative to mention that the company returned to gross margin growth in fourth-quarter 2018. While gross margin expanded after seven straight quarters of contraction, the company recorded the second consecutive quarter of operating margin expansion. Gains from the company’s productivity initiatives, pricing actions, and the revenue recognition standard provided a boost to gross margin, somewhat offset by higher inflationary pressures. Management anticipates this uptrend to continue in 2019 with normalized operating margin likely to expand 10-50 bps in the first quarter and 20-60 bps for the year.

Wrapping Up

Though concerns surrounding the company’s dismal top-line trends remain, we expect the company’s Transformation Plan to address the hurdles in the long run.

Three Better-Ranked Stocks in the Consumer Staples Space

Medifast, Inc. MED has an impressive long-term earnings growth rate of 20% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Procter & Gamble Company PG has outpaced the earnings estimates in each of the trailing four quarters by an average of 3.1%. The company has a Zacks Rank #2 (Buy).

General Mills, Inc. GIS is also a Zacks Rank #2 stock, which has delivered average trailing four-quarter positive earnings surprise of 6%.

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