Edgewell Personal Care Company (EPC) Q1 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reveals several concerns: declining sales in key categories, decreased gross margins, and increased operating cash usage. The Q&A highlights uncertainties, such as the impact of the Fem Care divestiture and vague guidance for future growth. Despite some positive aspects, like Sun Care growth and strategic focus, the overall sentiment is negative due to weak financial performance and lack of clear future guidance, likely resulting in a stock price decline.
Key Financial Performance
Organic Net Sales Decreased by 50 basis points year-over-year. This was due to stronger-than-expected performance in North America, offsetting declines in international markets. The decline in international markets was primarily due to new product development phasing in Wet Shave in Japan and lower Sun Care sales in distributor markets.
North America Organic Net Sales Grew just under 1% year-over-year. This growth was driven by meaningful growth in Sun Care as certain retailers placed seasonal orders earlier than expected, and strong growth in Grooming, partially offset by declines in Wet Shave and Skin.
International Organic Net Sales Decreased by 1.6% year-over-year. This was primarily due to new product development phasing in Wet Shave in Japan and Sun Care sales in distributor markets, where there was a large sell-in a year ago.
Wet Shave Organic Net Sales Declined approximately 4% year-over-year. Substantial growth in preps was more than offset by declines in disposables and men's and women's systems. International Wet Shave declined less than 1%, while North America Wet Shave declined due to challenged category and channel dynamics.
Sun and Skin Care Organic Net Sales Increased approximately 8% year-over-year. Sun Care grew nearly 20%, led by nearly 60% growth in North America due to earlier seasonal orders. Grooming grew nearly 7%, while Skin Care declined approximately 15%.
Adjusted Gross Margin Rate Decreased by 210 basis points year-over-year. Productivity savings of approximately 240 basis points were more than offset by 450 basis points of core inflation, tariffs, and volume absorption.
Adjusted Operating Income $8.1 million or 1.9% of net sales, compared to $15.9 million or 3.8% of net sales last year. This reflects primarily the impact of lower gross margins, partially offset by favorable FX tailwinds.
Adjusted EBITDA $25 million, compared to $30.9 million in the prior year. This includes an expected $5.8 million favorable currency impact.
Net Cash Used by Operating Activities $125.9 million for the first quarter of fiscal '26, compared to $115.6 million last year. This increase was primarily due to lower earnings.
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Operating Highlights
Innovation in Product Portfolio: Expanded Billie into Australia, Bulldog entered premium skin care across Europe, launched Progista in Japan, and broadened Cremo's range in the U.S. and Europe. Upcoming launches include Hydro and Intuition relaunches in Japan, new Wilkinson Sword and Hawaiian Tropic launches in Europe, and significant launches in Shave, Grooming, and Sun Care in the U.S.
International Market Growth: International markets now represent nearly half of total company sales. Growth is expected to resume in Q2 FY26, with mid-single-digit net sales growth anticipated for the fiscal year. Key markets like Oceania and Greater China experienced double-digit growth, while Europe delivered low single-digit growth.
Productivity and Supply Chain Optimization: Achieved 240 basis points of gross productivity savings in Q1 FY26. Actions include streamlining operations, reducing duplication, and investing in automation and digital tools to enhance agility and resilience. These efforts are expected to drive margin expansion and long-term productivity gains.
Divestiture of Feminine Care Business: Completed the sale of the Feminine Care business to Essity, simplifying the portfolio to focus on core categories like Shave, Sun, Skin Care, and Grooming. This move is expected to enhance competitive advantage and long-term shareholder value.
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Risk or Challenges
International Market Declines: Organic net sales in international markets decreased by 1.6%, primarily due to new product development phasing in Wet Shave in Japan and lower Sun Care sales in distributor markets. This decline highlights potential challenges in maintaining consistent growth in international markets.
Tariff and Inflation Pressures: The company faces a net tariff impact of approximately $25 million and 450 basis points of core inflation, which are affecting gross margins and profitability. These external cost pressures remain a significant challenge.
U.S. Wet Shave Market Challenges: The U.S. razor and blades category saw a consumption decline of 250 basis points, with the company's market share declining by 100 basis points. This indicates competitive pressures and a challenging market environment in the U.S. Wet Shave segment.
Stranded Costs from Feminine Care Divestiture: The divestiture of the Feminine Care business has resulted in stranded costs, which are impacting adjusted EPS and EBITDA. This transition poses short-term financial challenges.
Supply Chain Optimization Risks: Efforts to optimize the supply chain, including reducing complexity and increasing automation, carry risks related to execution and potential disruptions during the transition period.
Muted Category Growth and Cautious Consumer Behavior: The macro environment is marked by muted category growth and cautious consumer behavior, which could impact overall sales and growth potential.
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Guidance & Outlook
International Market Growth: Mid-single-digit net sales growth expected in international markets for fiscal 2026, with growth resuming in the second quarter.
Innovation Pipeline: Robust innovation pipeline for the second half of fiscal 2026, including product launches in Japan, Europe, and the U.S. across Shave, Grooming, and Sun Care categories.
Productivity and Margin Expansion: Approximately 240 basis points of gross productivity savings achieved in the quarter, with expectations for continued margin expansion supported by productivity gains and tariff mitigation efforts.
U.S. Commercial Transformation: Focus on returning the U.S. business to profitable sustained top-line growth, with increased investment in five core brands and a step-up in brand investment in the second half of fiscal 2026.
Fiscal 2026 Financial Outlook: Organic net sales growth expected in the range of down 1% to up 2%, with gross margin rate growth of 60 basis points year-over-year. Adjusted EPS expected to be in the range of $1.70 to $2.10, and adjusted EBITDA in the range of $245 million to $265 million.
Capital Allocation and Free Cash Flow: Adjusted free cash flow expected to be in the range of $80 million to $110 million for fiscal 2026, with proceeds from the Feminine Care divestiture directed towards debt reduction and investment in core brands.
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Shareholder Return Plan
Quarterly Dividend Payout: We continued our quarterly dividend payout, declaring $0.15 per share dividend for the first quarter, and we returned approximately $7 million to shareholders via dividends.
Share Repurchases: Adjusted EPS is expected to be in the range of $1.70 to $2.10. This outlook reflects the impact of expected share repurchases that are needed to offset current dilution.
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Key Q&A
Q:What are your thoughts on portfolio construction post-Fem Care divestiture?
A:The Fem Care divestiture was a strategic move to separate and sell a lagging part of the business. The company is now focused on Shave, Grooming, Sun, and Skin Care categories with five power brands. They aim to grow within the 2%-3% range starting in Q3, supported by new innovations, higher pricing in international markets, and increased marketing campaigns. M&A is not a focus; proceeds are directed towards debt reduction and potential share repurchase.
Q:Can you expand on expectations for fiscal Q2 organic sales and the differences between North America and international business?
A:For Q2, international sales will see slight growth due to innovation launches in Japan and even distribution of Sun Care shipments. North America will experience a 3% decline in organic net sales due to timing shifts in Sun Care and Japan promotions. Overall, H1 is expected to be down 2%, aligning with previous outlooks.
Q:What are the implications of Fem Care dilution into fiscal '27?
A:The Fem Care divestiture impacts EBITDA by $26 million and stranded costs by $30-$35 million, mitigated by transitional services agreement (TSA) income covering 75%-80% of stranded costs. Plans are in place to address stranded costs within 18-24 months. The company expects a stronger portfolio, improved profitability, and $150 million+ free cash flow by fiscal '27.
Q:What are your expectations for category growth in the back half of the year?
A:Category growth is expected to remain at 1%-2% globally. Improvement in the back half will be driven by share growth, better distribution outcomes, incremental pricing in international markets, and innovation launches. North America is expected to contribute significantly to growth.
Q:Why are retailers stocking Sun Care products earlier this season?
A:Retailers are stocking earlier due to a strong start to the Sun Care season and the timing of Easter. This shift is not expected to change the full-year outlook but provides confidence in achieving targets.
Q:Why is the EPS outlook range wider despite the Fem Care divestiture?
A:The wider EPS outlook reflects the impact of the Fem Care divestiture on adjusted EBITDA and EPS. The company remains committed to achieving the midpoint of the range and is encouraged by distribution outcomes in North America.
Q:What is the promotional intensity in the Wet Shave category in North America?
A:The Wet Shave category remains highly competitive, particularly in women's products. Promotional intensity is expected to persist throughout the fiscal year. The company plans to counter this with new campaigns, incremental investments, and innovation in the back half of the year.
Q:Are there any pockets of higher inventory or signs of trade down to private labels?
A:There are no significant inventory issues, and private label shares remain stable. Consumers are seeking deals and value within branded products, but there is no material trade down to private labels.
Q:Review of Unclear Management Responses
A:Management avoided providing specific guidance for fiscal '27 or beyond, using vague language about future growth and profitability. They also did not directly address the reasons behind the atypically wider EPS outlook range.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AP return
AP transformation
America retailer
America softness
Canada China
Care business
Care statement
Cremo
Edgewell
Fem Care
Feminine Care
Fran result
Japan launch
Sun Skin
action investment
basis outlook
brand market
capital allocation
complexity
conviction
core brand
detail
disposition
divestiture
generation
household penetration
investment brand
margin expansion
market sale
outlook Feminine
path
period
pillar
priority
productivity gain
resource
result basis
result expectation
speed
standpoint
structure
transaction
EPC Transcript
Edgewell Personal Care Company (EPC) Q1 2026 Earnings Call Transcript
Unknown2-9
The earnings call reveals several concerns: declining sales in key categories, decreased gross margins, and increased operating cash usage. The Q&A highlights uncertainties, such as the impact of the Fem Care divestiture and vague guidance for future growth. Despite some positive aspects, like Sun Care growth and strategic focus, the overall sentiment is negative due to weak financial performance and lack of clear future guidance, likely resulting in a stock price decline.
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The earnings call reveals a decline in key financial metrics like gross margins, operating income, and EPS, with additional currency headwinds and increased expenses. Although management provides optimistic guidance for future recovery, the Q&A section indicates skepticism about margin improvements and the impact of the Fem Care sale. The strategic plan's focus on debt reduction and brand investments doesn't alleviate immediate financial pressures. Given the market cap of ~$2 billion, the negative sentiment is likely to result in a stock price decline of -2% to -8% over the next two weeks.
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The earnings call reveals declining financial metrics, including a 4.2% drop in organic net sales and a significant decrease in operating income and earnings per share. The Q&A section highlights concerns about cash flow, reliance on international growth, and lack of clear guidance for fiscal '26. Despite some positive developments, such as balanced inventory levels and international growth, the overall sentiment is negative due to the weak financial performance and vague future outlook. Given the company's small market cap, this could lead to a stock price decline of -2% to -8%.
EPC Report
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