Prestige Consumer's First Quarter Exclusively In OTCs Is Prelude To Growth
This article was originally published in The Pink Sheet
Executive Summary
Prestige Consumer's sales in its latest quarter were lifted by gas relief and ear wax products, but the gains were offset "revenue recognition" accounting changes and slower sales of BC and Goody's as supplies of the analgesics transitioned to new packaging.
Prestige Consumer Healthcare Inc. encouraging performance in its latest quarter may boost confidence in its move to sell only OTC drugs and no longer have sales in other product categories to offset slumps in its health care brands.
The company's Nov. 1 update on its fiscal 2019 second-quarter earnings is its first quarterly report since changing its name to reflect the shift in product focus.
Sales for its lead OTC brands, BC and Goody’s powder acetaminophen formulations, were slowed by a move to new packaging, and kept its overall North America sales flat, up 0.3%, at $216m, the Tarrytown, N.Y.-based firm reported. Prestige reported its gastrointestinal and ear care categories led its sales in the region during the July-September period.
BC and Goody’s in easier-to-use packaging began reaching shelves at major retailers including Walgreens, Kroger and Walmart on Oct. 1. The distribution has moved to the convenient store and independent store channels.
"We anticipate shipment conversion from nearly all of our remaining customers" following the current quarter, said President and CEO Ronald Lombardi during a same-day earnings briefing. "We should gradually see both revenue and margin headwinds from the transition abate as we move forward."
The Dramamine (dimenhydrinate 50mg) motion-sickness brand was a key gastrointestinal category driver, Lombardi said. It was boosted by the recent relaunch of Dramamine-N (meclizine HCL 25mg), a product that treats nausea but addresses associated symptoms such as dizziness and vomiting.
The Debrox (carbamide peroxide) ear wax-removal brand is accounting for about 60% of category market share, the CEO said. The firm recently introduced a formula with more “microfoam” action that helps soften ear wax while producing a bubbling sound so a person using the product knows it is working.
Promotions for the brand include educating health care professionals about the product. “Debrox is also part of our digital marketing strategy and we’ve invested in brand placement and content to remind consumers of the brand,” Lombardi said.
Its cough and cold segment, which includes Chloraseptic (phenol 0.5%) throat spray, Luden’s and Sucrets throat lozenges and NasalCrom (cromolyn sodium 5.2mg) allergy nose spray, represents less than 7.5% of its business. “So it doesn’t move the needle like it did, but we made our shipments into the retailers … and we’ll see how the incident level drives takeaway as we get into the cough, cold season,” he added.
Prestige Consumer's international sector had revenues of $23.4m in the quarter, up 11.7% on a reported basis, fueled by an increase in consumption growth among the majority of OTC brands. The current and next quarter are the second half of its fiscal 2019, which ends March 31.
'Revenue Recognition' Accounting Affects Results
The Summer’s Eve and Monistat feminine care lines continue as key sales drivers but the brands – which account for 27% of the firm’s North American sales – were hit hard by a change in accounting policies for "revenue recognition" that also cooled its BC and Goody's brand results.
Chief Financial Officer Christine Sacco fielded repeated questions about the change during the briefing and explained that the timing for recording spending on promotions is one area affected. "When we talk about the timing of our net sales is around the timing of certain promotional expenses … that are requiring certain spending now to be recognized when product ships, when it used to be … when the related program ran," Sacco said.
That means that Prestige Consumer's spending on BC and Goody's repackaging launch was recorded in the July-September period when the brands' sales were slow because of the transition, not during the current quarter when the sales likely will be higher with new packages on store shelves.
"It's a calculation that's performed by our accounting team after the quarter is ended. It's for disclosure purposes only. It's completely independent of customer orders or delivery requirements," Sacco said, adding "adopting a new accounting standard didn't do anything to create more customer orders for us."
Prestige Consumer's total revenues in the quarter declined 7.2% to $239.4m, reflecting the impact of the divested household cleaning segment that was included in results last year. On an organic basis, sales grew 1.6%.
Net income was flat, slightly down at $30.8m. The firm reduced debt by $100m from its first quarter through a combination of cash generation and approximately $50m from divesting its household care brands, according to the release. The firm changed its name from Prestige Brands Holdings in August following its final quarter selling household care products. (Also see "Prestige's Monistat, Summer's Eve Brands Key Drivers In Consumer Health Focus" - Pink Sheet, 2 Aug, 2018.)
Jeffries analyst Stephanie Wissink said in a same day research not that the firn should have enough debit paid off in a little over two years to begin prospecting for acquisition targets again. Without household care products in its portfolio, "the focus will be on the OTC platform and additional tuck-in acquisitions are likely to play into either core power alleys or gaps in the mix,” she said.
Given the firm's revenue base, Wissink said a brand acquisition “with sales in the $100m+ range would be needed to be considered material and model moving.”
From the editors of the Tan Sheet.