I remain confused about the state of the markets.
Despite the S&P 500 being 30 points from an all-time high, the 52-week lows continue to outdo the 52-week highs. As I write this in early Wednesday trading, there are 199 52-week lows, 4x the 52-week highs on U.S. stock exchanges.
What the heck is going on? MarketWatch discussed the index’s direction in an article today.
“The strategists are sticking to their ‘already bullish’ end-year S&P 500 target of 5,500. That’s as they point out the index is at a ‘critical juncture,’ given narrow breadth, with just a few stocks leading the market higher,” MarketWatch’s Barbara Kollmeyer reported comments from Societe Generale strategists Manish Kabra and Charles de Boissezon.
As we speak, the index is at 5,468, less than 1% away from that target. With Nvidia (NVDA) and other Magnificent Seven stocks accounting for a large portion of the 15% gain in 2024, it makes a lot more sense.
While a tiny number of companies are doing much of the heavy lifting for the index, many others are struggling. None, more than Newell Brands (NWL), which hit a 52-week low of $6.24 today, its 14th 52-week low in the past year. It now trades at levels last seen in March 2009.
Is there any hope for the maker of Rubbermaid and 26 other significant revenue-generating brands? Maybe.
Let’s consider the circumstances under which its current turnaround succeeds.
An 8-Year Journey
Well, that’s not entirely true.
The company has been under some transformation plan since October 2016, almost eight years ago.
In October 2016, the company announced a new growth plan that included consolidating 32 business units into 16 operating divisions. At the same time, Newell created a global enterprise-wide e-commerce division.
“The company will also focus and strengthen its portfolio by holding a number of businesses for sale, using the proceeds primarily to accelerate debt pay down, and creating a platform for future acquisitions that strengthen and scale the company’s core businesses,” its Oct. 4, 2016, press release stated.
Those businesses accounted for about 10% of the portfolio. Businesses ultimately sold included the sale of its tool brands to Stanley Black & Decker (SWK) for $1.95 billion in October 2016. Overall, it sold $8.86 billion in businesses between October 2016 and the end of 2023.
As a result, it lowered its long-term debt by nearly 60% from $11.29 billion at the end of 2016 (post-merger with Jarden) to $4.58 billion at the end of 2023. However, with the downsizing, its revenues declined by 39% to $8.13 billion at the end of 2023, while over those seven years, its operating income went from a $1.1 billion profit in 2016 to an $85 million loss at the end of 2023. Even on a non-GAAP basis, operating income fell 86% between 2016 and 2023.
In March 2018, it locked horns with activist investor Starboard Value. Founder and CEO Jeffrey Smith, who took a 4% stake in the company, sending a letter to shareholders. A month later, it sent a second letter to shareholders, seeking the replacement of four board members, including three that were Carl Icahn representatives.
“We continue to believe that Newell is a valuable company with outstanding assets and brands. Unfortunately, due to a protracted period of mismanagement and poor Board oversight, operating results have deteriorated, which resulted in management breaking numerous operational promises to shareholders,” Starboard’s April 11, 2018, letter stated.
Two weeks later, Newell and Starboard made nice, with Starboard getting two independent directors appointed to the board, with a third elected to the board at the 2018 annual meeting.
By August of that year it had cut its stake in half. By the end of 2018, it had sold out entirely.
Fast Forward to 2023
In 2023, under CEO Chris Peterson, the company underwent a transformation of its corporate growth strategy, opting to focus on its “largest and most profitable brands, fastest-growing channels and winning retailers, and top 10 countries,” its June 2023 press release stated.
In January, it made organizational changes, to strengthen its ability to successfully engage its end-user customers so they better understand its brands and their value proposition. Due to these organizational changes, it expects to generate annualized pre-tax savings as high as $90 million with $55 million to $70 million of it in 2024. As part of the restructuring, it is cutting 7% of its office staff.
On April 26, Newell reported Q1 2024 results. Sales were $1.7 billion, 8.4% lower than a year ago. Excluding currency and the various divestitures since 2016, core sales fell 4.7%. Its gross margin improved 410 basis points to 31.2%. As a result, it generated a normalized operating profit of $76 million in the quarter (4.6% operating margin), considerably better than $46 million in Q1 2023.
In the twelve months ended March 31, it reduced its total debt by $600 million to $5.0 billion and $271 million in cash on its balance sheet.
For 2024, it expects sales to decrease by 6.5% at the midpoint of its guidance, with core sales down 4.5%, an 8.0% operating margin, earnings per share of $0.57, and $450 million in positive cash flow.
Most of these financial numbers will be worse than in 2023.
The Bottom Line
Newell CEO Chris Peterson and CFO Mark Erceg spoke glowingly about the company’s first-quarter results.
“The decisive actions we've taken as part of our new strategy have led to excellent progress on the major operational and financial priorities for this year,” stated Peterson in the Q1 2024 press release.
“The interventions made to operationalize Newell’s new corporate strategy and improve the structural economics of the business are taking hold as evidenced by the fact this was the third consecutive quarter of strong year-over-year gross margin expansion, enabled by world class productivity, favorable mix and pricing,” stated Erceg.
While the company’s gross margins are improving, leading to profits rather than losses, it won’t mean anything if it can’t reignite organic sales. And, if it can’t reignite organic sales, its past experience suggests it will tread carefully on any possible acquisitions.
However, trading at 15-year lows, aggressive investors are wise to consider options to bet on this transformation continuing to gain traction. I’m skeptical, but that doesn’t mean you should be.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
