Spruce Point Capital Management Releases A Strong Sell Research Opinion On Prestige Consumer Healthcare Inc. (NYSE: PBH)
NEW YORK, June 30, 2020 /PRNewswire/ -- Report entitled "Time To Nix Management" outlines how Prestige Consumer Healthcare Inc. ("PBH", "Prestige" or "the Company") faces 40%-60% downside risk to approximately $15 to $23 per share. The full contents of the report can be reviewed at www.sprucepointcap.com.
Spruce Point believes that it is time to replace the CEO and CFO of Prestige for their repeated inability to meet financial targets over the past 5 years. Under the current leadership, PBH's OTC consumer product brands have languished, while its debt load has multiplied and its organic revenue growth teeters on turning negative. Just yesterday, in its proxy statement filing, the Company admitted it could not offer credible 1- to 3-year financial goals; in our view this is not what investors should expect from a consumer staples company that analysts suggest is recession resistant. We believe COVID-19 has reshaped the retail landscape, leaving Prestige ill-equipped to succeed in an environment favoring greater e-commerce consumer purchasing.
We have serious concerns regarding current CFO and Chief Accounting Officer Christine Sacco and her team given their abysmal history at Boulder Brands, another consumer brands roll-up where management downplayed business, financial and accounting strains, only to later blind-side the market with large financial revisions, asset impairments, and a 50% stock decline. We are also calling on PBH's audit committee to conduct a full investigation into its financial reporting and accounting practices.
- Long-Term Secular Challenges And Competition From Private Label Brands: PBH's recent 10-K removed disclosure of its principal customers and distribution channels, bolstering our concerns that competition is increasing. Our numerous recent channel checks show PBH's brands are typically priced 50% more than nearly identical private label brands store brands, becoming more promotional, and in some cases losing shelf space. Recent Nielsen data corroborates these checks and shows PBH's price and volume sales are declining while private label brands are experiencing growth. We believe PBH is ill-positioned to compete through online channels as less-expensive store brands (including Amazon Basic products) appear first in keyword searches on retailers' websites.
- Continuously Misses Organic Revenue Growth Targets; Incentives Are Misaligned: Given management's repeated inability to hit organic revenue growth targets, we believe it is appropriate for its CEO and CFO to resign. Since being appointed, PBH has missed targets for 4 out of 5 years between 2015 – 2019, and was on pace to fall short in fiscal year 2020 before the fourth quarter one-time benefit due to the COVID-19 pandemic. Management guides investors to organic revenue growth and is increasingly prioritizing capital towards debt reduction, yet is paid bonuses on completely different metrics. Insiders own just 1.2% of PBH stock and receive annual pay raises 4x greater than Company organic growth.
- Multiple Signs Of Intensifying Financial Strain: Given the greater shift to e-commerce spending, and PBH's dependence on brick-and-mortar retailers (notably Wal-Mart), PBH's organic revenue growth appears poised to turn negative while its leverage ratio remains high at 4.7x. We estimate organic EBITDA has been declining, inventories are ballooning, and promotional spending to remain competitive has accelerated. Since Sacco became CFO, financial metrics such as the cash conversion cycle have materially worsened. Our research shows PBH is making unusual revisions to major brand revenue disclosures. We found Sacco made similar changes to revenue disclosures at Boulder Brands, right before its stock collapsed and the Company guided down financial projections.
- Poor Capital Allocation And Weak Balance Sheet: Expensive debt-fueled acquisitions have resulted in an over-levered balance sheet that is 87% goodwill and intangibles, and was recently scrutinized as a "Critical Audit Matter". We believe increased pressure on free cash flow will inhibit PBH from reducing leverage to its target level and ultimately result in asset impairments. Recent deviations from the Company's capital allocation plan have resulted in PBH repurchasing shares at a premium to the level it paid for the underlying businesses which is experiencing near zero organic growth. Management's recent comments to refocus on reducing debt may be a signal of cash flow drying up.
- 40%-60% Downside Risk: With consumption growth of 2%, lack of pricing power and increased competition, we view the Company's 2-3% organic revenue growth guidance as unattainable. Combined with a rising cost structure, we believe PBH's organic earnings will experience an unpreventable terminal decline. PBH trades at a premium to the sum of its acquisitions (average purchase multiple ~9x EBITDA), yet there is no demonstrated synergy value creation as a whole. We believe their brand values have eroded, and therefore should be valued at a discount to the historical purchase price.
Spruce Point Capital has a short position in Prestige Consumer Healthcare Inc. (PBH) and stands to benefit if its share price falls.
The research note can be found at www.sprucepointcap.com and updates will be posted on twitter @sprucepointcap.
