Hamilton Beach Brands (HBB) strong second-quarter results and positive outlook for the rest of its financial year has been reflected by a violent move up in their stock price. The company has benefited from changing consumer behaviors as people spend more time at home and shifted some of their discretionary incomes from travel and entertainment, towards home goods and household items.
Consumer demand in their U.S and Canadian markets was strong enough to offset declining sales in its commercial segment. This strong performance led to out-of-stock positions for certain product categories which retailers are now starting to replenish. On the other hand, management expects the recovery in its commercial side of the business to remain sluggish, with food service and hospitality customers still under pressure from the impacts of COVID.
While we don’t expect demand for home appliances to continue growing at the same pace it did in Q2, we believe demand should stay strong for a few more quarters, as people continue to work and spend more time at home.
Management’s decision to dissolve its Kitchen Collection business should clean up the income statement moving forward, which would shine a positive light on the performance of the Hamilton Beach brand. The company’s results have been shadowed by the many years of underperformance of Kitchen Collection. With that segment clear out, investors would have a better look at Hamilton Beach’s earnings power and less volatile results.
Priced at 10x forward earnings, we believe the company trades at a fair multiple. Growth should start to moderate in the upcoming quarters, so assigning a growth multiple to the company could be asking too much. That said, HBB is a solid and mature business that would become interesting from an investing point of view if it trades below its current P/E multiple. That would increase the margin of safety and prospective investment returns.
Solid Q2 growth
HBB reported sales growth of 5.5% to $138 million in its second quarter, compared to $131 million in the previous year. Driving sales growth for the quarter was a surge in demand in the small kitchen appliance industry in the U.S market.
The company experienced robust point-of-sale growth, outperforming the industry. As stated by management, Hamilton Beach Brands remained number #1 overall based on units sold as of the end of its second quarter. There was also outperformance in its higher-end products in brands such as Weston and Wolf Gourmet. Due to the strong demand seen during the quarter, certain products went out-of-stock at its retail partners, but are starting to replenish.
The company’s e-commerce channel also played an important role during its second quarter. HBB saw e-commerce growth of 77% during the quarter compared to its prior-year period, accounting for 37% of total sales. This was a sequential improvement to the 23% e-commerce growth in Q1, which accounted for 27% of total sales.
On a negative note, HBB believes its commercial business would remain under significant pressure, however, the company is seeing order flows beginning again, especially with its food service customers. The same can be said about its international business, where the company’s e-commerce channel is not as developed as it is in the U.S, depending largely on retail partners and foot traffic to generate sales.
That said, strong consumer demand in the U.S and Canada is offsetting the weak performance in its commercial and international segment. As a result, management believes they can achieve sales growth of mid-to-high single digits in its second half.
There are a few reasons for the expected strong performance in its second half. For example, there is the fulfillment of incremental order as retailers return to normal inventory levels plus the gains in placements and the strength of promotions planned for the holiday season.
It is also important to note that many retailers such as Walmart (WMT) and Amazon (AMZN), HBB’s two biggest customers, are starting their holiday season this month, extending the selling season in hopes of stimulating consumer purchases and locking in early sales as a hedge to political uncertainty. If the government approves another round of stimulus relief, then HBB could see another short-term boost in sales.
The Bottom Line
With the liquidation of Kitchen Collection, investors looking at HBB filings would notice less volatile results, more in-line with a mature company with an important market position. Management made it clear Kitchen Collection results would no longer impact the company:
I’d also like to remind everyone that Kitchen Collections’ net losses and negative cash flow no longer have an impact on our company. I think the benefit of closing the business through a successful liquidation has gotten a little lost in everything else going on this year, but I wanted to make a point that we are fortunate to have completed the wind down last year. – Q2 call
Cleaning up the income statement could create a better financial picture for investors. It also allows the company to focus entirely on strengthening its Hamilton Beach brand. Management believes its wide product assortment, which ranges from the low to the high end of the spectrum, to be a competitive strength coupled with the constant product introductions and innovations. For 2021 and 2022, the company expects to introduce over 100 new products.
There is also the case for better gross margins. During Q2, the company saw an increase of 370 basis points in gross margins due to sales volume and product mix. When asked during its conference call whether gross margins were sustainable at that level, management felt optimistic:
So we feel like the growth that we’re getting and the variety that we have across our brands and our value propositions is going to allow us to hold our gross margins as we move forward. – Q2 call
We believe HBB is a solid business as evidenced by their returns on capital which have averaged approximately 17%, making it safe to assume that the company earns more than its cost of capital. To re-ignite growth, management hinted at possible M&A opportunities or new strategic partnerships.
Priced at 10x forward earnings, we believe the company trades at a fair valuation. That said, we are keeping HBB in our watchlist waiting for a bigger margin of safety.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.