A volatile morning has shares of personal care products company Edgewell Personal Care (EPC 43.90, -2.34, -5.1%) off their worst levels, though still firmly in the red – after being down as much as 7.2% after the bell as investors digest the company’s mixed fourth quarter report and underwhelming fiscal year 2019 profit guidance.
Simply put, fourth quarter earnings per share (EPS) beat market expectations at $1.11 while sales declines of 4.9% year-over-year to $537.4 million were steeper than expected in part due to higher promotional and coupon spend in North America and Europe. In the quarter, the company recorded a $25.3 million one-time charge to cost of goods sold due to costs associated with the write-off of select Sun Care product inventories. Organic net sales, which excludes sales impact from the Jack Black and Bulldog acquisitions, the Playtex gloves divestiture, and the translational benefit from currency, were down 4.7%.
Specifically, excluding a $7.5 million benefit from the Jack Black acquisition, a $3.3 million negative impact from the Playtex gloves divestiture and a $5.0 million negative impact from currency translation, organic net sales decreased 4.7%. The declines were primarily driven by the impact of unfavorable price mix in Wet Shave and lower volumes and price mix in Feminine Care, partly offset by growth in Sun and Skin Care.
Gross margin decreased 490 basis points to 43.1% from the prior year period. Excluding the $25.3 million impact of Sun Care reformulation costs this quarter, gross margin decreased by 20 basis points to 47.8%. Favorable cost mix (160 basis points) was more than offset by the impact of unfavorable price mix (140 basis points), primarily in Wet Shave and Feminine Care, and unfavorable volume mix (40 basis points). The favorable cost mix was the result of reduced operational spending and favorable transactional currency impacts, partially offset by higher commodity and warehouse and distribution costs.
Edgewell also made significant progress on its cost savings initiative, dubbed Project Fuel. Significant progress was made on Project Fuel in Q4 as the cumulative gross cost savings projection for fiscal year 2019 increased from $80 million to approximately $130 million (including $15.4 million in 2018 savings), and the timeline for savings overall was accelerated. This will enable the company to offset significant inflationary headwinds, and also will allow for an expected reinvestment of approximately $45 million into Edgewell’s brands in fiscal 2019.
The company now expects Project Fuel will generate $225-240 million (previously $225 million) in total annual gross savings by the end of the 2021 fiscal year. To implement the restructuring element of Project Fuel, the company now estimates one-time pre-tax charges to be approximately $130-140 million (previously $120-130 million), with an additional capital investment of $60-70 million through the end of the 2021 fiscal year.
Moving to guidance, for fiscal 2019 Edgewell expects reported net sales to be down low single digits compared with the prior year, including an approximate 100 basis-point unfavorable impact from currency translation and a 60 basis-point combined benefit from the Jack Black acquisition and Playtex gloves divestiture. The outlook for adjusted EPS is in the range of $3.30 to $3.60. Project Fuel is expected to generate approximately $115 million in incremental gross savings in fiscal 2019. For fiscal 2019, Project Fuel related restructuring charges and capital expenditures are now expected to be approximately $70-80 million and $40-50 million, respectively. Total Company capital expenditures, including Project Fuel are expected to be approximately 4% of net sales. The effective tax rate for the fiscal year is now estimated to be in the range of 23.5-25.5%.
Further, in terms of phasing for the year, the company expects the organic net sales rate decline through the first half of year to be comparable to the fourth quarter of fiscal 2018 and expects the quarterly adjusted EPS profile to be similar to fiscal 2018.
A miss on sales and gross margin contraction wasn’t what investors were expecting from the Schick brand owner today. What’s more, the caliber of savings from the company’s Project Fuel plan isn’t up to snuff compared to what the market had anticipated, while the reinvestment amount is likely not enough to offset sales declines at some of the company’s most desirable brands.
Shares of EPC have been on the retreat this year, falling as much as 33.5% YTD in early May. The stock ran up against solid resistance for the past eight trading days in the 50-day simple moving average (47.33); today’s disappointing print and outlook was enough to push the stock lower off the technical indicator as shares are now in danger of closing lower for an eighth-straight session. Shares of personal care product peers KMB -0.33%, PG -0.08%, and CL +0.77% trade split after EPC's report.