Investing

Newell May Need New Leadership to Sell a Value Trap as a Value Stock Story

Jon C. Ogg

Published: January 25, 2018 2:20 pm

Last Updated: January 12, 2020 4:05 am

It’s a raging bull market that is now nearly nine years old. Investors have gotten rich as the major stock indexes went up and up since that magical V-bottom at the start of March 2009. The Dow Jones Industrial Average was up almost 25% and the S&P was up over 19% alone in 2017, and both indexes were up over 300% from that V-bottom low when panic selling ruled. This might make investors think that they could do no wrong. Unfortunately, this a market full of stocks, and not every stock rises.

Newell Brands Inc. (NYSE: NWL) is one of the many companies that is easily recognized by the public but just manages to keep destroying more and more shareholder value while the economy is great and the stock market is at all-time highs. Michael Polk, CEO since July of 2011, initially seemed to be a chief executive who could do no wrong.

Unfortunately, the world of consumer goods and a changing retail landscape means that there are winners and losers. Maybe it can be blamed on the so-called Amazon Effect, or maybe there is just more competition for cheaper goods and more and more bargain stores. Either way, the performance of Newel Brands landed Michael Polk on the list of our own 20 worst CEOs of 2017.

Newell also was recently named as one of several turnaround candidates for 2018, but that now seems to be dead.

When 24/7 Wall St. ran the year-to-date performance (December 26, 2017) for Newell brands it was −31%. That’s the day we published the 20 worst CEOs of 2017 list. There is just one problem, Polk hasn’t reinvigorated Newell. In fact, Newell is now going to unload even more brands and will close factories. And with Newell shares at about $24.50 now, the stock is down another 20% since then.

Newell is perhaps best known for its Rubbermaid plastic storage containers and its own name brand, but Newell also has the brands of Sharpie pens, Calphalon cookware, Graco baby carriers, Yankee Candle and a whole host of others.

Polk did manage to lead a successful turnaround since rolling out his growth game plan in 2012, but the $15 billion acquisition of Jarden that closed in early 2016 may have marked a zenith for the Newell — and for Polk’s tenure as CEO. As of December, Newell’s stock had fallen 44% from $54.85 in mid-June of 2017 to $30.21 in mid-December. At $24.50 or so now, that’s a drop of 55% at the same time there is a raging bull market.

The retail environment is more than challenging at this time. Shelf space in stores is tight and the competition in a world of Amazon and the ever-worrisome omnichannel trends seem to eat into margins of almost anything at some point. Still, many retailers shined quite brightly this last holiday season. Some investors even feel like the secular “death of retail” trend was grossly overstated. It now seems like Newell just can do nothing right.

Investors may be worried about higher debt levels at Newell, with more than $11 billion in long-term debt alone. Any major acquisitions could have further added to debt, but that risk now seems gone.

Investors were already armed with the knowledge that Newell was going to trim roughly 10% of its portfolio of brands. Selling off a legion of brands can be tricky and disruptive, and if improperly handled it can hurt the sales of tertiary brands housed under the same umbrella of the parent structure. The company has sold brands tied to its tools and winter sports segment.

Now Newell has said that it is exploring strategic options for the smaller consumer businesses. These include Rawlings, Goody, Rubbermaid Outdoor, Closet, Refuse and Garage and U.S. Playing Cards. It’s also exploring strategic options for industrial and commercial product assets such as Waddington, Process Solutions, Rubbermaid Commercial Products and Mapa.

If Newell succeeds, it will go to a business that has roughly $11 billion in sales and $2 billion worth of EBITDA. If executed properly, the strategic options would affect close to a 50% reduction in Newell’s global factory and warehouse footprint. It would also result in a 50% reduction in its customer base, and would lead to consolidation of 80% of its global sales on two ERP platforms by end of 2019.

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The problem is that Newell’s strategy is going the wrong way for what bull market investors want. The 2016 revenues jumped to $13.2 billion in 2016 from $5.9 billion in 2015. Going back to $11 billion doesn’t sound like a great growth story.

Newell’s guidance didn’t sound all that bad if you only looked backward and if you lived in a vacuum. The company now anticipates core sales growth of approximately 0.8% (versus prior guidance 1.5% to 2.0%) and sees its normalized EPS in the range of $2.72 to $2.76 (versus prior guidance $2.80 to $2.85). The company also sees approximately $1.0 billion of operating cash flow generated during the fourth quarter of 2017, which will result in full-year (2017) operating cash flow of about $930 million (versus prior guidance of $700 to $800 million). That sounds cheap for an earnings multiple of less than 10, until you factor in the pain and charges that are likely to come inside the company in its restructuring saga.

The company further said that core sales results were impacted by an acceleration of the gap between sell-in and sell-through results due to a continuation of retailer inventory rebalancing in the United States and the bankruptcy of a leading baby retailer. Its margins were said to be impacted by the negative mix effect of lower writing sales and a reduction of fixed cost absorption due to shorter cycle runs on self-manufactured products, designed to reduce inventories and maximize operating cash flow.

Will Newell really win in tax reform? Newell now sees its own corporate tax rate dropping to a rate of 20% to 21% ahead. It was roughly 27.3% in 2016.

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Michael Polk said of the restructuring:

Today’s announcement is a step toward a significant acceleration in our transformation plan. We believe that exiting non-strategic assets, reducing complexity and focusing on our key consumer-focused brands will make us more effective at unlocking value and responding to the fast-changing retail environment. A stronger, simpler, faster Newell, together with leading brands, brilliant marketing, outstanding innovation and an advantaged e-commerce capability, better positions us to win in these dynamic times. As a result, we have chosen to explore these strategic options.

Polk further said:

Despite a very difficult commercial outcome in the second half of 2017, the vast majority of our brands are performing well in the marketplace. Our e-commerce business grew at a strong double-digit pace, our market shares have continued to increase and sell-through growth has accelerated with Q4 2017 growth rates ahead of Q3 2017 in the U.S., which strengthens our confidence in our brand, design and innovation-led strategy. Importantly, our early efforts to improve working capital metrics look to have yielded good results with operating cash flow of nearly $1 billion dollars in Q4, despite the increased margin pressure from planned downtime in our factories and input cost inflation. We are committed to achieving our transformation objectives and are taking decisive action with speed to adapt our agenda to the unprecedented volatility in our retailer landscape.

Newell was a great growth story for years, and the company seemed to be able to do no wrong at one point in time. That was then. It just seems to be harder and harder to be a brands company operating in a world dominated by Amazon and omnichannel-style retail.

Newell had a pretty compelling value stock story to sell to investors after its shares were gutted in 2017. That story just became a much harder sell, even at less than 10 times earnings. If the process is going to go through 2019, company morale is likely to be quite low along with employees’ share value.

Investors just do not want to hear about a story like this in a raging bull market. The indexes keep rising, to the point that companies losing investors money are thrown into the trash bin.

Maybe Newell needs to seriously consider new blood to run the company in this new direction.