Hamilton Beach Brands Holding Co. (HBB) Misses Q3 EPS by 71c, Revenues Miss

Hamilton Beach Brands Holding Co. (NYSE: HBB) reported Q3 EPS of ($0.15), $0.71 worse than the analyst estimate of $0.56. Revenue for the quarter came in at $110.55 million versus the consensus estimate of $162.7 million.

Highlights from Continuing Operations

• Revenue in Q3 2020 decreased 26% compared to Q3 2019 due primarily to greater than anticipated challenges arising from the implementation of a new enterprise resource planning (ERP) system in the US and also to unanticipated constraints in the transportation industry.
• In the US Consumer market, while unprecedented demand continued, timing of revenue is expected to shift to Q4 2020 as the cutover to the new ERP system temporarily reduced shipping capabilities.
• Sales volumes in the International Consumer and Global Commercial markets decreased as expected due to pandemic-driven demand softness. Sales volumes in the Canada Consumer market increased as expected.
• An unprecedented surge in demand for small kitchen appliances continues and the Company entered Q4 2020 well positioned to meet customer needs with a significant backlog, strong order pipeline for the holiday selling season and the necessary inventory to fill orders. Strong demand is expected to continue into Q1 2021.
• For the second half of 2020, total revenue is expected to be in line with the second half of 2019 and operating profit is expected to increase approximately 20%.
• Net debt at September 30, 2020 decreased to $69.6 million compared to $78.6 million at September 30, 2019 due to improved net working capital.

Third Quarter 2020 Compared to Third Quarter 2019 - Continuing Operations

Net loss was $2.0 million, or $0.15 per diluted share, compared to net income of $0.6 million, or $0.04 per diluted share.

Revenue was $110.5 million compared to $149.5 million. As expected, sales volumes in the International Consumer and Global Commercial markets decreased as a result of pandemic-driven demand softness. Also as expected, sales volumes in the Canada Consumer market increased.

In the US Consumer market, while unprecedented demand continued, sales volumes were lower than expected primarily due to timing of revenue that is expected to shift to the fourth quarter of 2020 as the result of greater than expected challenges arising from the implementation of a new enterprise resource planning (ERP) system. The cutover to the new ERP system temporarily reduced shipping capabilities at the Company's US distribution center. Shipping capabilities also were adversely affected by unanticipated constraints in the transportation industry.

Shipping challenges related to the ERP implementation have been resolved, while shipping and transportation congestion persist for the Company and its customers. The Company has enhanced its shipping capabilities by adding warehouse personnel and lift equipment, extending shifts and augmenting capacity with temporary third-party facilities. The Company also has been able to convert some of the order volume with its largest retail customers to direct import to further ease the strain on its shipping capabilities.

Strong demand for small kitchen appliances during the pandemic continues and the Company entered the fourth quarter well positioned to meet customer needs with a significant backlog, strong order pipeline for the holiday selling season and the necessary inventory levels to fill orders. The Company has significantly increased the in-stock levels at its largest customers and sell-through rates at retail are in line with the market.

Operating loss was $2.4 million compared to operating profit of $4.4 million. Gross profit margin increased to 21.5% compared to 20.7% despite the significantly lower sales volume. Selling, general and administrative expenses decreased to $25.8 million compared to $26.2 million.

Net debt at September 30, 2020 was $69.6 million compared to $78.6 million at September 30, 2019, primarily as a result of improved net working capital. Use of cash before financing activities was $8.8. million for the nine months ended September 30, 2020 compared to a use of $27.3 million at September 30, 2019, reflecting in both years the normal inventory build for the holiday selling season. There were no share repurchases during the third quarter.

Outlook

During the time since the COVID-19 global pandemic began, the Company's focus has been on the safety and health of its employees, serving customers and consumers, and moving the business forward. Hamilton Beach Brands is a leader in an industry that is providing essential products during the pandemic.

Unprecedented demand in the US and Canada continues as homebound consumers engage in more than usual meal and beverage preparation during the pandemic. The retail business in Mexico and Latin America is slowly rebounding. Commercial customers in the food service and hospitality industries are beginning to order again as they adjust to the new world created by the global pandemic.

The Company's leading portfolio of consumer preferred brands and products, which ranges from value to luxury and covers more than 50 categories, is a key competitive advantage. The Company's strong capabilities in the growing ecommerce channel, its global infrastructure and team members, and its diversified retailer relationships have positioned the Company well to meet the demand surge for small kitchen appliances. The Company's third-party manufacturers have been agile in responding to the elevated demand.

Hamilton Beach Brands has introduced more than 50 new products this year and expects to introduce approximately 100 more new products over the next 24 months. Even with employees working remotely, the Company's new product development process is working well. Placements for the holiday-selling season are strong, including many new products.

While the impact of the ERP implementation on third-quarter 2020 results was disappointing, the related shipping hurdles have been resolved and the Company expects to benefit in future years from the conversion to a more efficient and secure system. A significant amount of the Q3 2020 revenue shortfall is expected to shift into the Q4 2020 as the Company focuses on maximizing its shipment capabilities to capture as much of the market demand as possible. Based on early fourth quarter results, shipments are ahead of last year.

Based on its current outlook, the Company expects total revenue for the second half of 2020 to be in line with last year's second half and operating profit to increase approximately 20%. Any interruptions in shipping caused by a further challenged transportation industry or unexpected ERP complications, while not anticipated, could cause results to fall short of expectations.

The Company's goal continues to be to exceed $20 million in cash flow before financing activities for the full year 2020, while timing of some accounts receivable collections could move into Q1 2021 due to timing of revenue expected to shift from Q3 2020 to Q4 2020, which will be determined as the fourth quarter unfolds. The Company continues to effectively manage discretionary spending and net working capital.

Visibility into 2021 beyond the expectation of continuing to meet strong demand in the first quarter is limited, so the Company is deferring any outlook for the full-year 2021 to a later time.

Hamilton Beach Brands business is seasonal and much of its revenue and operating profit is earned in the second half of the year when sales of small kitchen appliances to retailers and consumers increase significantly during the holiday-selling season. For the past five years, on average, 60% of revenue and 85% of operating profit have been earned in the second half of the year.

For earnings history and earnings-related data on Hamilton Beach Brands Holding Co. (HBB) click here.

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