Fortune Brands Q1 Earnings Miss, Outlook Revised - Analyst Blog

Despite headwinds like harsh weather and sluggish new construction activities, Fortune Brands Home & Security Inc. FBHS began 2014 with adjusted earnings per share EPS climbing 4.2% on a year-over-year basis to 25 cents. However, adjusted earnings came substantially below the Zacks Consensus Estimate of 32 cents. Adjusted net income for the quarter advanced 3.6% to $42.7 million.

On a GAAP basis, Fortune Brands' earnings soared 9.1% to 24 cents per share. Also, reported net income increased by 9.4% to $40.8 million.

Looking Deeper

Although net sales for the first quarter advanced 8.6% year over year to $966.2 million, it fell short of Zacks Consensus Estimate of $993 million. Excluding extreme winter conditions, total sales would have escalated 13% year over year.

Fortune Brands' Kitchen & Bath Cabinetry, Plumbing & Accessories and Advanced Material Windows & Door Systems are collectively named the home product segment. The company registered a 9.3% increase in the consolidated home product segment sales, which came in at $850.8 million. Excluding the impact of weather, home product sales would show a 14% jump.

Adjusted gross profit inched up 3.9% to $315.4 million, while gross margin contracted 150 basis points (bps) to 32.6%. Operating income before including any one-time items came in at $65.1 million, up 4.3% from the year-ago comparable quarter, with adjusted operating margin shriveling 30 bps to 6.7%.

Segment Details

Sales at the Kitchen & Bath Cabinetry segment ascended 19% to $410.9 million, on the back of solid increases in dealer network coupled with robust remodel and repair mix and volumes. The segment reported a 34% rise in adjusted operating income, which came in at $20 million.

Plumbing & Accessories segment sales remained flat year over year at $309.9 million, supported by strength in China and the U.S. network. Adjusted operating income for the segment climbed 1% to $55.4 million.

Advanced Material Windows & Door Systems sales were up 5% to $130.0 million, as entry door sales witnessed an 8% increase and window sales remained relatively flat. The segment operating loss narrowed to $7.7 million from $7.9 million last year.

Sales at the Security & Storage segment picked up 3% to $115.4 million, benefitting from a 4% and 2% rise in security sales and tool storage sales, respectively. However, adjusted operating income slipped 2% to $12 million.

Financial Details

Fortune Brands ended the quarter with cash and cash equivalents of $124.2 million, while long-term debt (excluding current maturities) was $475.0 million. Shareholders' equity (excluding non-controlling interests) at the quarter end was $2,637.2 million.

During the reported quarter, the company made several investments in designing, planning and implementing additional capacity in the plumbing and cabinetry segments. The company aims at making continuous investments in enhancing its incremental capacity in order to facilitate sales growth of roughly $6 million in the next 3 years.

Moreover, a day before the earnings release, the company also increased its quarterly dividend by 20% to 12 cents a share.

Looking Ahead

Based on the assumption that U.S. home products market will grow by 9–10% in 2014, the company forecasted sales to advance by 10–12 for the year %, as against 11–13% predicted earlier.

Further, since the first quarter was hit by bad weather, the company updated its adjusted earnings guidance to a band of $1.90–$1.99 for 2014, compared to previous projections of $1.91–$2.01. Currently, the Zacks Consensus Estimate for 2014 stands at $1.97 per share, falling within the company's range.

Moreover, Fortune Brands is expected to generate free cash flow of over $250 million in 2014, after excluding the impact of its expected capital expenditures of roughly $130-$140 million.

This leading home and security products company believes that it has built an impressive momentum in the last couple of years and is well placed to boost profits in the future. Also, management believes that after overcoming a harsh winter, the company is now regaining pace as consumer traffic is improving and is likely to deliver robust performance in the second half of the year.

Other Stocks to Consider

Fortune Brands currently holds a Zacks Rank #4 (Sell). Other better-ranked stocks in the retail sector include Bon-Ton Stores Inc. BONT and Rite Aid Corporation RAD, both holding a Zacks Rank #1 (Strong Buy) and Restoration Hardware Holdings, Inc. RH, holding a Zacks Rank #2 (Buy).