Newell Speeds Up Transformation, Dips On Soft Initial Results

Newell Brands Inc. NWL has been keen on the execution of its transformation plan through market share gains, point of sale growth, innovation, e-commerce improvement, and cost-savings plans. In a move to accelerate the pace of transformation, the company is looking to exit non-strategic assets, reduce complexity and focus on key consumer-focused brands. This will help improve operational performance and enhance shareholder value, amid a rapidly changing retail backdrop.

The company reported soft preliminary results for 2017 and lowered view. Additionally it outlined the initial expectations for 2018.

Consequently, shares of Newell Brands as much as 18.9% since the news. Overall, the stock has declined 37.4% in the last three months, against the industry's growth of 0.5%.

Coming back to the transformation plan, the company is accelerating the pace by restricting Newell's portfolio on nine core consumer segments that can garner nearly $11 billion of sales and $2 billion of EBITDA. Further, the company is looking for strategic alternatives for assets in its industrial and commercial product as well as smaller consumer businesses.

Brands to be evaluated in the industrial and commercial product business include Waddington, Process Solutions, Rubbermaid Commercial Products and Mapa. Meanwhile, the company's Rawlings, Goody, Rubbermaid Outdoor, Closet, Refuse and Garage, and U.S. Playing Cards are other brands chosen for exploring strategic options.

The strategic alternatives for these brands will significantly lower the company's operational complexity by reducing 50% of its global factory and warehouse presence. Additionally, it will reduce the company's customer base by 50% and result in consolidation of 80% of global sales on two ERP platforms by end of 2019. The completion of these plans will aid in making Newell a nearly $11 billion focused portfolio company with leading consumer-facing brands, attractive margins and significant growth potential in global categories.

The company anticipates after tax proceeds from these efforts to be higher than what is required to reach a leverage ratio below the lower-end of the current leverage ratio target range. The company is likely to start the evaluation process immediately with results from the transactions coming by the end of 2019. With this, the company anticipates to be better positioned in the dynamic retail landscape with its leading brands, excellent marketing, innovation and solid e-commerce capabilities.

Throwing light on the performance in 2017, the company stated that core sales remained soft due to widening of gap between sell-in and sell-through results driven by continuation of retailer inventory rebalancing in the United States and the bankruptcy of leading baby retailer. Further, the company's margins were hurt by the negative mix of lower Writing sales and lower fixed cost absorption due to shorter cycle runs on self-manufactured products, designed to reduce inventories and maximize operating cash flow.

However, the company remains encouraged by brands performance as well as strength in e-commerce business, which maintained a double-digit growth rate. Further, the company expanded market share while accelerating sell-through growth rates in the United States in the fourth quarter, ahead of the third-quarter levels. This reaffirms the company's confidence in its brands, design and innovation-driven strategy.

Further, the company's efforts to improve working capital seems to be paying off with nearly $1 billion of operating cash flows generated in the fourth quarter, in spite of increased margin pressure from planned downtime of factories and input cost inflation.

Based on the preliminary results, the company lowered projections for 2017 and provided an initial view for 2018. The company now expects core sales growth of nearly 0.8% in 2017, compared with 1.5-2% growth predicted earlier. Normalized earnings per share for 2017 are estimated to be $2.72-$2.76, compared with the previous forecast of $2.80-$2.85.

The aforementioned $1 billion operating cash flows for the fourth quarter resulted in $930 million operating cash flow for the full year. This surpassed the company's prior expectation of $700-$800 million.

For 2018, the company expects to record core sales growth driven by continued gain market share gains in its core categories and geographies, partially offset by persistent retailer inventory reductions. The company anticipates normalized earnings per share of $2.65-$2.85. The company assumes tax rate of 20-21% including the benefits of U.S. tax reform. Operating cash flow for the year is estimated in the range of $1.15-$1.45 billion, excluding the effect of potential divestitures.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report