HOBOKEN, N.J. – Newell Brands (NYSE: NWL) is a bit of a Smithsonian.
It arguably has one of the greater collections of brand names of any U.S. company. Sunbeam, Shakespeare, Blue Diamond, Oster, Coleman, Sharpie, Rubbermaid, Elmer’s, Rawlings, to start. Each brand is well-known in its sector, well respected and unfailingly iconic, even if that is an overused word. Most often, and this is key to brands, it is either the leader in the category, or still better, the sole owner. Think Elmer’s Glue, Ball jars, X-ACTO knives, Crock-Pots, and even those Dymo label printers, ubiquitous in every Mad Men office.
In some sectors like Dymo, it is the inventor of the category; think Mr. Coffee, Yankee Candle and Rubbermaid. In other situations, it has become the best known provider in a dependable but un-glam product sector, such as Graco baby products, NUK binkies, Stearn’s life vests, Calphalon cookware and First Alert fire detectors.
With the quality and number of brands it owns, all led by clever staff, it asserts that it is “building one of the most transformative consumer products companies in the world.” The company has recovered from a Great Recession low of $5.65 in 2008. But this Nov. 21, the First Alert alarm rang when it hit a low of $27.97, off from a high of $54.85 on June 16, 2017. It is still profitable, and with dividend, but the market has partially lost interest, though the stock has recovered to the $31 range, indicating some confidence.
Chief Executive Michael Polk called third-quarter results “below expectations” as their “transformation progress” was overshadowed by “retailer inventory rebalancing” related to “decelerating U.S. market growth through the Back-to-School period.” Sales for third quarter were down 7 percent, and a $1 billion stock repurchase was announced. Translated into the sort of English perhaps heard by Newell’s sales reps visiting Bentonville, Ark., I can reword: Sales are dropping, and our plan to bring all of these odd businesses into one company failed when we put the glue and pens out in July.
One of its more dependable products is the Coleman two-fuel lantern, sold for $99. It works with both Coleman fuel or unleaded gas. Dozens of Coleman products are as interesting as this, and as well made, and all essential items in a hurricane. But this year, astonishingly, Newell made hurricanes an excuse for sales and production numbers. The reality? Coleman products should have been the FIRST things flying off the shelves before Harvey, Nate, Irma and Maria, as the coolers, cookers and the like are essentials during disasters. After, it should have sought the royal warrant as supplier to the Cajun Navy.
The question is why, when on paper (not Liquid Paper, yet another Newell product), the company makes sense and does all the “right” things. Sometimes, the market just does not respond properly to what a company is doing. Only time, consistency and dividends prove the situation.
Results for 2017
Digging into the financials indicates some questions about the restructuring, and perhaps answers the questions as why the stock is 44 percent off its 52-week high.
Its 10-Q filed on Nov. 8, 2017 indicated over $1 billion in restructuring and other costs expected through 2021 to integrate Newell Rubbermaid and Jarden, what it calls the Jarden Integration. From 2016 to 2021, Newell expects to see $1.3 billion in cost savings through this restructuring. So that means it is going through a wrenching process, moving around and changing all of the guts of the company, to save only $300 million in over a half dozen years. While every dollar saved helps the bottom line, this type of disruptive cost cutting only helps the company if the restructuring grows sales.
This restructuring, as described, is completely reorganizing the total company along new reporting lines as of Jan. 1, 2017. Instead of nine mostly logical sectors that include writing, home solutions, tools, commercial products, baby and parenting, branded consumables, consumer solutions, outdoor solutions and process solutions, the company is now organized along the lines of what it calls a New Growth Game Plan. The goal? Newell Brands makes life better for hundreds of millions of consumers every day, where they live, learn, work, and play.
The Game Plan has formal segments that include Live, Learn, Work, Play and Other. While this segmentation would seem to be a useful set of general goals to help explain the company, it unfortunately too much reminds of an un-serious work, rest or play Milky Way television commercial. In addition, these unfortunately named units are actually now broken out on their 10-Q into accounting financial sectors. Can you imagine telling someone that you are in charge of the Play sector and you are moving to the “Work” sector?
The breakdowns do not always make sense. Dymo labeling tapes are in Learn whereas one would expect them to be in the Live or Work categories. It would stand to reason that Waterman pens, a luxury item, are about either “Live”, “Work” or “Play”. But they are in the Learn sector. Its Nov. 2, 2017 third-quarter earnings report confirms some of this confusion. In its Learn sector, operating margin was 10.5 percent vs. 19.5 percent in the prior year. Normalized operating margin was 15.6 percent of sales compared with 22.2 percent last year. It attributed it to lower margins on high margin writing products, not a good sign in a year of Trump and one percenters.
Sorting through its 2016 Annual Report and 10-K shows other issues. In April, it bought Sistema, a food container company based in New Zealand, for $472 million. While the products are well made and handsome, and certainly profitable, they are the sort of products Rubbermaid used to sell and design, begging the question of why the company is unable to develop these products on its own.
On September 4, 2014, the company bought Ignite Holdings LLC, makers of Contigo and Avex drink containers, for $313 million. That year, Newell also bought Bubba Brands, a drink container company, for $82 million. There is nothing wrong with buying another company in the same sector. But when your main brand is Coleman, and your core company and brand is the inventor of the idea of coolers and molded plastic containers, to have to spend a third of a billion on outside acquisitions to remain up with trends indicates that you are unable to keep up with market fashions. And if the company were to buy such a brand, Tervis Tumbler of Sarasota might have been the more hip choice.
Imagine if that $400 million had been invested in the core Coleman brand over the same period of time in elements like a Super Bowl ad, in store marketing, product research, camping events and promotions in National Parks. In this market run-up of 2017, we might not have had the 2017 selloff.
Sorting Brand Clutter
In 2011, the company announced a revamp entitled Project Renewal. It called it an “initiative designed to reduce complexity in our operating structure and realign resources to our highest potential businesses.” The plan would achieve $90 to $100 million in savings over 12 to 18 months and “invest the majority of these funds back into the business in increased brand building support, strengthened demand creation capabilities in customer development and marketing, and the development of our business system in emerging markets.” That’s shorthand for cut out the overhead, and put it into marketing. The question is how much it has worked seven years out. And has it translated into products, margins and profits?
Part of the problem is not of their making; many of the brands like Coleman and Sunbeam were part of the “Chainsaw Al” Dunlap mess, and they have not recovered. Institutional history is gone.
Most of brands that it owns can be categorized as emblems of America, the sort of products you would have found in any general store back around 1940. In some ways, they sell themselves. But for their long-term success, they can’t rest. For those brands, you need to have creative people behind them, understanding the essence of the brand; these people also need to be completely empowered.
Again, on paper, this should be working. Company leadership is experienced; CEO Michael Polk has experience at Unilever, P&G and Kraft. They do not lack imagination or the appreciation for the visual aspects needed to sell brands in stagnant categories; one of the board members is Domenico Del Sole, the chairman of the fashion brand Tom Ford and former Gucci chairman. He certainly has the oomph to ask the right questions when the packaging is frumpy and the advertising is tired. He almost certainly appreciates the design of a new Sistema food container.
There is a strong design sense; it even shows off its Michigan-based “Newell Design Center” on its Instagram page, led by Nate Young, senior vice president, “design and ideation.” This is a self-consciously self-aware au courant company. The photos of the design center on its website tell us that some of the design staff are multicultural (Sikh), others have tats, and yet others have clever toys on their cubicles. The fifties modern design includes quotes from design guru Charles Eames and conspicuously captioned Herman Miller (NASDAQ: MLHR) chairs. A handsome space, but it may not connect well with the average Joe picking up a Shakespeare Ugly Stik Bigwater rod from privately held Bass Pro Shops.
In 2016, Newell announced a move of its headquarters from Atlanta to Hoboken, though many positions would stay in Georgia. This is a disconnect; company management should be near to some part of their product. In this case, an incentive package helped them decide; we wonder if the real decision was that management just wanted to be near New York.
Underperforming Against Competitors
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Competitors are doing better, though defining what they are is a challenge as Newell is in so many sectors. Johnson Outdoors (NASDAQ: JOUT), which owns the likes of Boston Whaler and Johnson outboards, has accelerated its per share price from around $20 in 2013 to $72.25. The challenge, however, is comparing the Newell stock with other companies, as it competes in so many sectors. Is it a sporting goods company like Brunswick (NYSE: BC)? An appliance company like Stanley Black & Decker (NYSE: SWK)? A brand licensing outfit? A housewares company? A commodity metals producer?
Perhaps individual products can tell the story of the company. How have they missed the mark? And what is the opportunity?
Boston Sharpeners: The Boston pencil sharpener, sold for over a century, is one of those great American products that we all know and love. The company began around 1899 as the Boston Pencil Sharpener Company with later owners Hunt Manufacturing, X-ACTO and Elmer’s. The products from even the ’60s and ’70s still work. But what Newell has done is un-improved it and lost margins. It even changed the name to X-ACTO, totally destroying all Boston brand value. Back around 1912, the predecessor Boston Pencil Sharpener Company was selling them for $1. Today, they are now only about $7.50 or up, which makes them vastly cheaper today than they were originally. Made overseas, they are not as durable as the original. Blogger Patrick Ng laments, Although these X-ACTO branded sharpeners have their origins from the original Boston Pencil Sharpener Company, they are now made in China and the charisma is almost all gone. His alternative? Buy a $300 to $600 deluxe El Casco sharpener from Spain, if you want something that lasts. Opportunity: Bring back the Boston name, and offer a solidly priced, over engineered, high-margin model for about $20 that will last for generations, look elegant, and again be in every home, office and school. Ohio Blue Tip: Back in 1983, the book Quintessence detailed great consumer brands that “offer more to us than we specifically ask of them and to which we respond more strongly than is easily explained.” One of those brands was the Ohio Blue Tip match, a Newell product. Cigar Aficionado writer Andrew Nagy, a fan, wrote a column in 2013 on predecessor Jarden Corp., that quietly pulled the Ohio Blue Tip in 2011 to focus on its other match brand, Diamond Matches, though brought it back. “Cigar and pipe enthusiasts who have come to rely on the tiny wooden bringers of fire bemoaned the day,” wrote Nagy. Opportunity: Products like Ohio Blue Tip can be high margin items, if made exceedingly well and properly marketed. Price, market and advertise them accordingly. Prismacolor: The colored pencils, so favored by artists and students, were for decades known as Berol Prismacolor. Today, Newell owns the company, but it has allowed what was a robust group of high end artist materials under the Berol name to become a one-dimensional product line, thereby losing margins. Opportunity: Re-Berol Prismacolor, and focus on quality in packaging and product, reminding that the Prismacolor and other Berol products are an essential set in any artistic household, and not just for insipid adult coloring books. Coleman, a Bellwether Brand
Coriscana, Texas, entrepreneur and attorney Enoch Basnett sells Coleman parts to high-end collectors and lovers of the brand with his E.J. Basnett Co. Basnett believes the appeal of the Coleman brand is its quality, calling their lantern the best liquid fuel lantern ever sold by anyone in all time.
Newell predecessor Jarden did not understand how to nurture Coleman, and other brands, a practice continued by Newell. The strategy was to outsource and license out the brand, and make it available at mass market stores. They cheaped-out and Chinesed-out all of their product, said Basnett.
Coleman has missed out on trends. For instance, Coleman invented the molded plastic cooler, an innovation of an engineer who by legend came up with the idea while his kids were playing with balloons.
Today, startup Yeti Coolers of Austin, Texas, far surpass Coleman in price margins and customer perceptions of quality and coolness. Its a lifestyle brand built on a cooler, said Basnett of Yeti, an approach that Coleman used in the past to great success. They [Coleman] could have become a great lifestyle brand.
As younger and more affluent consumers lose touch with the original merits of these once ubiquitous brands, they eventually become irrelevant, and forgotten. In a company as large as Newell, faceless brand managers are unable to make decisions, and consumers begin to only know the brands through mass retailers.
You get these companies that have lost authority, said Basnett. The answer is to devolve decision making. For generations, Coleman had headquarters in Wichita, Kansas; pushing decision making down close to manufacturing and distribution would help keep the brand unique. Nevertheless, Basnett believes the predecessor Newell Rubbermaid does have a strong design and quality sense that has not yet translated to brands like Coleman that were part of Newell’s purchase of Jarden.
Comparison With Leaders
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Among Newell’s brands and subsidiaries is a metals processing company, Jarden Zinc. Nothing wrong with running a zinc processor and making money off the penny and U.S. Treasury, but it is a very different business proposition than Penn fishing reels, Waterman pens and Quickie kitchen mops.
Roughly comparable Procter & Gamble (NYSE: PG) focuses on about 70 brands, but it is a much bigger company with many $1 billion brands. The other parallel company in philosophy is Berkshire Hathaway (NYSE: BRK.A) (NYSE:BRK.B), which has discrete companies, each run as separate units, and not company divisions. Perhaps the more practical comparison is Church & Dwight (NYSE: CHD) which takes a handful of American brands and turns them into dependable machines that print cash, year after year.
The chart above has each of the stocks since 1990; to be comparable, Newell should be around $60 to $70 a share, not $30. There would be an excuse for this slump if Newell made bad products or it had off-brand names, but Newell has some of the most recognizable brand names around. It just needs to invest in them, and not continue to turning every Elmer cow into glue.
There is value in Newell, and no immediate danger, as the dividend history keeps it viable. But that does not mean it has a certainty about how to live into its legacy, and that is a big question for those who search for long opportunities. A good strategy might be to look for a few consecutive quarters of improving margins, per share earnings and sales volume before getting back in.
Recent years are proving destructive to Newell’s great brands; it needs focus, and a concern for quality. A new philosophy and approach could unlock value. Newell should treat each sacred brand as would a venture investor and custodian. Each of these great companies, so important to American business history, deserves the attention.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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