Newell Brands Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Newell Brands is a global consumer products company with a strong portfolio of well-known brands, focused on enhancing the everyday lives of consumers through innovation, design, and distribution.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Newell Brands operates across three primary segments: Home and Commercial Solutions (including kitchen appliances, storage, and organization), Learning and Development (including writing instruments and school supplies), and Outdoor and Recreation (including outdoor equipment and gear). The company’s portfolio features well-recognized brands such as Rubbermaid, Sharpie, Paper Mate, and Coleman.

Business Overview:

Newell Brands operates a diversified portfolio of consumer products across various categories. This diversification allows the company to tap into different consumer segments.

  • Home and Commercial Solutions: This segment, representing 44% of total sales, includes a variety of products designed for household use and commercial settings, such as Rubbermaid storage and organization products, Calphalon cookware, and Rubbermaid Commercial products.
  • Learning and Development: This segment, representing 34% of total sales, primarily offers writing instruments under the brands of Paper Mate, Sharpie, and Prismacolor as well as other products used by children and students.
  • Outdoor and Recreation: Representing 22% of total sales, this segment offers outdoor recreation-related products including camping equipment under the Coleman brand, Graco baby strollers and highchairs, and other outdoor and sports-related accessories. The company sells its products through various channels, including mass retailers, e-commerce sites, and specialty retailers.

The company’s strategy is focused on leveraging its brands and scale to drive productivity and efficiencies, improving its online presence, and streamlining operations to increase profitability. Newell has struggled to achieve meaningful growth through brand enhancement and acquisitions.

Industry Trends and Competitive Landscape:

The consumer products industry has witnessed an increase in direct-to-consumer sales and an evolution of online market penetration. The industry is also facing challenges from rising raw materials costs, inflationary pressures, currency fluctuations, and supply chain disruptions.

  • The competitive landscape is generally fragmented, depending on the product line. Newell faces competition from other large branded consumer goods companies, smaller specialized companies, and private label offerings from mass retailers.
  • The company has been impacted by a shift in customer preferences for personalized and sustainable products. A notable change is that many companies are focusing on ESG initiatives.

What Makes Newell Brands Different?

Newell Brands positions itself as a leading provider of everyday products with brands that have high customer awareness and established distribution channels.

  • It possesses an extensive global sales and distribution network.
  • The company has a diverse range of brands across multiple product categories.
  • The company emphasizes innovation in products and technology.
  • Newell’s scale and global supply chain is designed to offer efficiency and flexibility.

Financial Analysis:

  • Revenue: Newell Brands reported a net sales decline of 8.5% year-over-year in Q3 2023, reflecting a challenging consumer environment. In fiscal year 2022 the net sales decreased by 2% year-over-year.
  • In general, the business has struggled to grow sales and revenues over the past few years. This has impacted the company’s ability to return value to shareholders.
  • Margins: Newell Brands has recently reported a gross profit margin of 31.4% for the three months ended September 2023, a decline from the 33.8% in the same period in 2022. They are trying to get the margins up to 35%. Operating margins have also been pressured, showing weakness in the business operations. The net income margin for the nine months of 2023 is a very low 2.28%, compared to 3.7% in 2022 and 4.3% in 2021.
  • The company’s profitability has been hurt by a decline in revenues coupled with higher costs, particularly the costs of raw materials.
  • Cost Structure: The company is heavily focused on cutting costs. Selling, General, & Administrative costs are at 25% of revenues, while cost of goods sold are at 68% of revenues.
  • Cash Flow: The company has been producing positive free cash flow but is also struggling to increase its free cash flow YoY, with $486 million generated for 2023 YTD, compared to $676 million in 2022 during the same period. The cash flow is also quite volatile and is dependent on changes in working capital and inventories.
  • Debt: The total debt is around 4.74B. The net-debt to adjusted EBITDA is 4.3.
  • The company is in line with its peers from a leverage position, and has a net-debt to EBTIDA ratio of under 5, which is good for the long term. There is no debt maturity until 2027, therefore the company has time to improve.

Moat Analysis:

Newell Brands has some characteristics of a company with moats, but it doesn’t meet our criteria for a strong moat rating. I am giving a 2/5 for the moat rating, based on these factors:

  • Brand Recognition: Many of Newell’s brands, such as Rubbermaid, Sharpie, and Paper Mate, have strong brand recognition. The strength of a brand can make it easier for a company to create customer loyalty, potentially leading to higher profitability over time. However, these brands don’t always allow the company to charge higher prices because there are substitute brands. Therefore, Newell doesn’t have pricing power and brands are not an economic moat in themselves. The brand value helps them with better distribution.
  • Distribution Network: The company has a wide distribution network, which serves as a barrier to entry for new companies. This helps Newell Brands reach more consumers more efficiently. However, competitors can replicate or gain this advantage through partnerships.
  • Economies of Scale: Newell Brands benefits from economies of scale in manufacturing and distribution, as the company is a large player in the consumer products sector. However, scale is not a competitive advantage in itself. It is a benefit that must create some difference in profitability that is hard to replicate to be considered an economic moat.

Legitimate Risks:

Several risks can erode Newell’s competitive advantages and hurt its performance and profitability:

  • Supply Chain Disruptions: Global events like a recession, wars, and trade tensions can affect the production and delivery of the company’s products. These could impact profitability, especially if the company cannot pass on higher costs to its customers.
  • Changes in Consumer Preferences: Changing tastes and consumer preferences can mean a drop in demand for the company’s products, potentially affecting sales and revenues.
  • Competition: Competitors may take market share from Newell by creating better products, cutting prices, improving logistics, or increasing advertising and marketing. The fragmented nature of the industry intensifies this risk.
  • Commodity Prices: The company is highly dependent on commodity prices, particularly for resins used in plastics. Changes in commodity prices can directly affect the company’s profits.
  • Inflation: Rising inflation makes consumers cut back on expenses, and the lower income consumer that makes a big portion of Newell’s customer base, can be particularly vulnerable to price increases.
  • Debt Burden: With significant amount of debt, the company might face issues relating to payments and may not be able to continue with its expansion plans. Rising interest rates may also worsen this risk.

Business Resilience:

Newell Brands has been through several cycles of booms and busts over the years, and has shown its resilience.

  • Brand Loyalty: Many consumers are loyal to the company’s brands, and this creates some predictability and stability to revenues. However, brands alone are not the answer for sustainable profitability, and Newell must prove that it has pricing power.
  • Diversified Portfolio: The diverse range of the company’s brands and segments minimizes the impact from a specific downturn in any particular sector. However, diversity is useless without a strong focus.
  • Cost Management: The company is focused on cost cutting and improving the profitability of its product lines. The management is actively working towards streamlining operations and reducing unnecessary spending. Cost advantages alone are not the answer for an economic moat, but a good indicator.

Understandability: 3/5

While Newell Brands is a consumer goods company, and the consumer behavior and product categories are fairly easy to understand, analyzing the financials of Newell can be a difficult task because they are complex due to the multi-segment structure. The accounting practices and the way the company handles acquisitions also lead to a very confusing picture. Therefore a 3/5 is appropriate as we have seen that the company has some complexities that make it difficult to understand.

Balance Sheet Health: 3 / 5

Newell Brands has moderate debt with a high interest coverage ratio, which is a net positive. However, it is not in the best position to quickly deploy debt for acquisitions and expansion activities. The working capital is high because they have large inventories. The company must focus on streamlining its financial structure and reduce operational complexities. However, there is no immediate danger of bankruptcy or financial distress so a 3/5 is appropriate. The company’s financial health is slightly below average, however, it has potential for improvement if they can successfully carry out their restructuring plans.