Spectrum Brands Holdings, Inc.
Moat: 2/5
Understandability: 3/5
Balance Sheet Health: 2/5
Spectrum Brands Holdings, Inc. is a consumer products company that operates in a variety of markets, including pet care, home & garden, and personal care products.
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.
Spectrum Brands’ business model revolves around acquiring and managing a portfolio of consumer brands.
Business Overview
Spectrum Brands (SPB) operates across multiple segments with a focus on branded consumer products:
- Home and Personal Care: This segment includes a range of products designed for home and personal use, such as small appliances, personal care items, and home environment products.
- Global Pet Care: Offers a variety of products for pets, including aquatics, reptile and small animal supplies.
- Home & Garden: Focuses on lawn, garden, and insect control products.
- Hardware & Home Improvement: This segment includes a wide array of hardware and home improvement products.
The company’s portfolio spans a wide range of well-known brands, including:
- Kwikset, Weiser, National Hardware, Pfister: The company sells door locks and hardware and they are very well known in their industry.
- Black Flag, Cutter: These are known for insect and weed control and they are also quite old.
- Tetra, FURminator, DreamBone: These are well-known within the pet industry, for fish food, grooming and pet treats.
- Remington and George Foreman: well-known within the personal care and grooming industry.
Industry and Competitive Landscape
The consumer products industry is characterized by high competition, constant product innovation, and shifts in consumer preference.
- Pet Care: A rapidly growing industry with increasing pet ownership and spending on pet care. Competition includes both large, established brands and smaller innovative startups.
- Home & Garden: Is a cyclical market with seasonal demand and competition coming from both big box stores and smaller niche retailers.
- Home and Personal Care: A stable market, this market has a lot of big players that have strong brand equity and the customer is mostly interested in prices.
- Hardware & Home Improvement: This market is heavily concentrated and dominated by a few large distributors that exert a lot of pressure on the suppliers.
SPB’s differentiation is mainly through brand strength. While they have some differentiated product lines, for example, a unique pet grooming line, they are mostly dependent on brand recognition. This makes the company a “brand holding company” that relies mostly on advertising and shelf space to drive revenues and ROIC.
Financial Performance and Analysis
SPB’s financial performance is heavily reliant on acquisitions to drive revenue growth rather than organic sales.
The following data was extracted from Spectrum Brands’ latest filings. Please note that there are large one time expenses due to the restructuring and also the large writedowns due to goodwill amortization from past acquisitions, which have been marked with a “*” label.
| September 30, 2023 (Year) | September 20, 2022 (Year) | |
|---|---|---|
| Net sales | 3,097 | 2,871 |
| Cost of goods sold | 2,407 | 2,217 |
| Gross profit | 690 | 654 |
| SG&A expenses | 673 | 670 |
| Operating Income | 17 | -15 |
| Interest expense | 271 | 239 |
| Loss on debt extinguishment | - | 149 |
| Other, net | 1 | (1) |
| Income before taxes | (253) | (404) |
| Income taxes | (115) | (105) |
| Net Loss from Continuing Operations | (137) | (299) |
| Net Loss from Discontinued Operations | (431) | 23 |
| Net Loss | (568) | (275) |
| Earnings per share | (10.74) | (5.70) |
| Cash Flow From Operations | 52.5 | 174.2 |
| Capital Expenditures | (72.8) | (109.7) |
| Free Cash Flow | (20.3) | 64.5 |
| Net Working Capital | 736.4 | 858.8 |
| Total Assets | 5,571.7 | 5,351.3 |
| Total Liabilities | 4,198.5 | 4,391.2 |
| Total Equity | 1,373.2 | 960.1 |
| Net Debt | 2,760 | 3,026 |
| Goodwill and intangibles | 3,818.5 | 4,083.9 |
- Revenue Growth: Revenue grew by 7.9% from 2022 to 2023 mainly because of the acquisition of a company called “Reef”. Otherwise organic growth is negligible, around 2%.
- Profitability: SPB’s gross profit margins are strong, close to 23%. But operational expenses are close to the gross profits so this results in small profits. Interest expenses are also high, at 271 million per year because of the high debt load. They have significant recurring expenses related to intangible assets in their P&L, which are related to the amortization of the goodwill.
- Free Cash Flow: SPB had a negative Free Cash Flow in 2023 because of higher than usual capital expenditures. However, operating cash flows were still positive.
- Debt Levels: SPB has a concerning level of debt on its books, at 4.2 Billion dollars in total debt and the debt/equity is at 3.1x.
- Goodwill and Intangibles: Over 68% of their assets comes from goodwill and intangibles ($3.8B vs $5.5B assets) which creates some significant risk for the business.
Moat Assessment: 2/5
Though it has several well-known consumer brands, SPB’s moat is limited by the relatively low switching costs and competition in its different market segments.
- Brand Recognition: SPB’s brands possess a certain level of recognition in their respective categories. However, they do not typically have strong brand loyalty or pricing power (except a few brands in their pet segment).
- Switching Costs: Switching costs for most of their consumer goods are low, as is brand loyalty. Therefore the customer can easily switch brands without penalty.
- Network Effects: SPB has no network effects, so its products do not become more valuable as more people use them.
- Cost Advantages: SPB generally operates at high cost structure and therefore does not have cost advantages stemming from economies of scale.
- Intangible Assets: SPB does have some intangible assets such as patents or trademarks that it can use to sell differentiated products. However, this mostly exists in the pet segment, and the company mostly relies on marketing and name recognition.
Moat Risks and Business Resilience
The most significant risks include high debt, competition from private label brands, and failure to create value through acquisitions.
- High Debt: The high levels of debt increases the risk of financial distress and makes the company more vulnerable to the economic downturn.
- Competition: The company has to compete against larger, established companies with strong brand equity, and against smaller, newer companies that try to compete via product differentiation or lower prices.
- Acquisition Risks: SPB has grown through acquisitions, and there’s a risk that those acquisitions could fail to create value or disrupt the existing business.
- Commodity Prices: Many of SPB’s materials are sensitive to commodity prices, which can have a big impact on its profit margins.
- Supply Chain issues: The company also risks running into disruptions, logistical problems or increase in shipping and sourcing costs as a globalized company.
- Changes in Customer Preferences: Failure to recognize a shift in customer preferences and adapt accordingly could damage the brand and lead to decreased revenues.
SPB’s resilience to this risks is questionable. If its existing brands lose their value, the company may suffer huge losses since 68% of its assets comes from goodwill and intangibles, and it is also heavily leveraged with debt. The company also has an acquisition driven growth policy which increases the risks of poor financial performance.
Understandability: 3/5
Spectrum Brands’ operation across multiple industries with several consumer brands leads to a moderate degree of complexity in understanding its business.
The variety of brands and segments that SPB operates in makes it a little bit complex to fully understand the business. A deep understanding of each of its products, consumer base, and supply chain is a challenging task to complete. Also, its highly leveraged capital structure and frequent acquisitions also create complexity in its overall structure.
Balance Sheet Health: 2 / 5
The company has a weak balance sheet mainly due to its high debt load and large goodwill.
- High Debt Load: Total debt is over 2x of its equity, which poses a significant financial risk. High interest payments can hinder profitability.
- Goodwill and intangibles: 68% of its assets comes from goodwill and intangibles, which will lead to write downs that will affect profitability and ROIC negatively.
- Liquidity and Solvency: While SPB’s current assets are almost equal to the current liabilities, it is not enough to comfort the company’s ability to service short term obligations. This makes the company susceptible to financial distress.
Recent Concerns and Management Perspective
Latest earnings calls show that management is aware of the problems and are attempting to work towards long-term growth and profitability.
In a recent earnings call, management stressed their focus on improving ROIC by improving their operating efficiencies, while still pursuing growth through acquisitions. They also acknowledged the market’s current perception of the company as highly leveraged and has promised to reduce their debt levels. Management also emphasized their commitment towards brand building and innovation to increase margins and sales. They also mentioned their commitment in growing the free cash flow of the company in upcoming years.
Management stressed that their plans are going to be long-term and thus their effect may take some time to materialize.