We are maintaining our HOLD rating on Tupperware Brands Corp. (NYSE: TUP), which we recently upgraded from SELL based on the company’s improved financial results. New CEO Miguel Fernandez has implemented a plan to restore top-line growth by strengthening core operations and making Tupperware a leaner, more digitally driven and customer-focused business. The plan includes simplifying the company’s organizational structure, expanding the use of B2B partnerships and licensing, increasing the use of predictive analytics, and shifting to online sales strategies. The company has also been aggressively cutting costs, and is on track to deliver $180 million in cost savings this year. While we remain concerned about the impact of slower consumer spending and Tupperware’s ability to sustain sales growth over the long term, we are encouraged by the new management team’s turnaround efforts and recent quarterly results, and look for further signs of improvement over the next year.
TUP reported 3Q20 net sales of $477.2 million, up 14% as reported and 21% in local currency. Sales also topped the consensus estimate by $112.7 million, and showed substantial improvement from the first and second quarters. The improvement was driven by B2B partnerships and the increased use of digital technology to engage customers. Salesforce productivity improved as virtual parties replaced traditional in-home Tupperware parties, and the company segmented sales to target different audiences. Tupperware also improved attendance at its annual conference from 2,500-3,000 attendees prior to the pandemic to approximately 8,000 at its recent virtual conference. The increase in at-home food consumption has also boosted sales of TUP’s food prep and storage products.
The company reported 3Q GAAP net income of $34.4 million or $0.65 per share, up 341% year-over-year. Adjusted EPS rose to $1.20 from $0.36 a year earlier and topped the consensus forecast by $0.79. The stronger EPS reflected sales growth and gains from cost-savings programs.
Sales improved in most regions, with North America up 42%, Europe up 23%, and South America up 4%. Sales in the Asia Pacific region fell 6%, with sales in China down 12% in local currency. Sales in the U.S. and Canada grew a strong 72% from the prior year – the best quarterly growth in 20 years and the highest sales since 2002. The total sales force of 2.97 million was down 3% from the prior year, while the number of active sellers grew 10% to 598,253.
TUP sold the remaining assets in its Beauticontrol business in December 2017. After failing to find a buyer for the business, which lost $2.6 million in 1H17 and $4.1 million in 2H16, the company decided to sell the remaining inventory. In all, the company incurred $45 million in pretax costs related to the wind-down of this business.
EARNINGS & GROWTH ANALYSIS
Based on the company’s better-than-expected results and prospects for further improvement driven by the new CEO’s turnaround plan, we are raising our 2020 EPS estimate to $3.09 from $2.31. We are also raising our 2021 forecast to $3.44 from $2.60.
Management withdrew its 2020 guidance with its 1Q results.
FINANCIAL STRENGTH & DIVIDEND
The company’s debt is rated Baa3/stable by Moody’s and BBB-/stable by Standard & Poor’s. At the end of 3Q, the total debt/capital ratio was 147%, reflecting the company’s shareholders’ deficit, up from 146% a year earlier, and the adjusted EBITDA ratio was 3.72. Year-to-date, TUP has retired $220 million of senior notes at a discount, leaving a balance of $380 million. Management is working with advisers to address its debt prior to maturity next June, and said it expects to meet its debt obligations through increased profitability and the sale of real estate and other noncore assets.
Management said the company would continue to prioritize the use of capital for investment in the core business. We do not expect Tupperware to buy back stock or pay a dividend in the near term.
MANAGEMENT & RISKS
Miguel Fernandez, the former global president of Avon Products, became Tupperware’s new president and CEO on April 6, 2020, replacing Patricia A. Stitzel, who resigned in November 2019 after two years as the company’s first female CEO. Richard Goudis, previously the CEO of Herbalife, became executive vice chairman in March 2020.
Investors in TUP face a number of risks, including adverse currency movements, competitor discounts, and changes in the cost of resin. The company operates in many countries, but seems to have a different sales and sourcing strategy for each market. This decentralized approach can work if managers are competent, given responsibility and properly incentivized, but sharing ‘best practices’ across divisions can be difficult. Many of the company’s markets are mature or in decline, while others are in a turnaround or growth mode. We believe that the company has lowered its business risk by winding down the underperforming Beauticontrol business.
Tupperware, based in Orlando, Florida, is one of the world’s leading direct sellers of food storage, preparation and serving items. The company sells through partnerships, with 3.2 million independent sales consultants in over 100 countries. It reaches consumers primarily through ‘home parties,’ retail access points in malls called Experience Studios, and other venues.
TUP shares fell to a low of $1.25 earlier this year before beginning to recover, and jumped nearly 68% after the company reported 2Q results and 25% after reporting 3Q results. The 52-week range is $1.15-$33.50.
On a fundamental basis, TUP shares trade at 10.7-times our 2020 EPS estimate, near the low end of the five-year average annual range of 9.8-18.8 and below the average multiple of 13.7 for a peer group that includes Newell Brands (NWL) and Lifetime Brands (LCUT), among others. The price/sales ratio is 0.9, below the five-year range of 1.0-1.9 but in line with peers. The price/cash flow ratio is 10.8, toward the low end of the five-year range of 9.1-16.4 and in line with peers. We are encouraged by the company’s increased use of virtual marketing, new partnerships, and growing sales force-which had been on the decline. However, we remain concerned about Tupperware’s debt burden and potential for long-term sales growth, and about the impact of slower consumer spending.