Kelly Evans: The fall of Troy

Scott Mlyn | CNBC

What was supposed to be another fairly normal, nothing-to-see-here earnings report from Helen of Troy yesterday morning turned into a scene of chaos and destruction. The company lost almost thirty percent of its market value after revealing a surprise 12% drop in revenue from a year earlier, and a 72% drop in earnings per share. Wow. 

It was the company's first revenue miss in more than five years, and only the second such profit miss, according to MarketWatch and FactSet. The shares--which went public more than fifty years ago--had their worst day ever. Helen owns a variety of well-known home and beauty brands, including Oxo, Revlon, Hot Tools, Bed Head, Vicks, Pur, and drybar. Weakness was particularly acute in beauty and wellness, where sales dropped 15% year-on-year. 

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"We are disappointed with the start to our fiscal year," the CEO said in their earnings release. He cited "an unusual number of internal and external challenges in the quarter," including some shipping disruptions. And perhaps there were some idiosyncratic reasons for their weakness. But investors aren't buying it.  

What the outsized market reaction tells you is that Helen is now perceived to be one of the more vulnerable names in a weakening consumer environment. At a moment when shoppers are widely described as becoming "choosier," in other words, they ain't choosing Helen's brands--or at least not at their current price points. Indeed, Helen is already seeing margins suffer (they dropped 30% year-on-year!) from offering "trade discounts, allowances, and promotional programs" for its beauty and wellness products.  

Which is reminiscent of what we are also watching play out across the salty snacks business. Consumers are pushing back on big-name brands after years of price hikes. They're going generic, lower price (like Utz), or foregoing entirely.  

So you might think, why then are shares of Walmart, in such a time like this, trading at an all-time high? But it actually corroborates the slowdown certain brands are experiencing and the broader consumer slowdown we appear to be in. Jim Paulsen has been tracking the "Walmart Recession Signal," which is when shares of Walmart start breaking out to the upside relative to the S&P global luxury index. 

This is happening right now. More intriguingly, it comes as corporate credit spreads have remained fairly low. Normally, in a slowdown, they'd start rising, especially on the "junkier" end of the spectrum. "The current divergence...is one of only three divergences since 2007," Paulsen notes. In 2015-16, spreads widened but Walmart didn't break out, and sure enough we avoided recession. In 2019, Walmart started outperforming while spreads stayed low--but we were, in fact, heading into a downturn.  

So far, in other words, Walmart has been a reliable leading indicator of a slowing economy. Whether that means we're heading into a recession still remains unclear--but it certainly implies Fed rate cuts would be helpful at this juncture.  

See you at 1 p.m!

 Kelly

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