Earnings Call Transcript - HELE Q2 2024

Jack Jancin, Senior Vice President of Corporate Development

Thank you, operator. Good morning, everyone, and welcome to Helen of Troy's second quarter fiscal 2024 earnings conference call. The agenda for the call this morning is as follows. I'll begin with a brief discussion of forward-looking statements. Mr. Julien Mininberg, the company's CEO, and Ms. Noel Geoffroy, the company's COO, will comment on the financial performance of the quarter and current trends. Then, Mr. Brian Grass, the company's CFO, will review the financials in more detail and our financial outlook for fiscal 2024. Following this, we will take questions you have for us today. This conference call may contain certain forward-looking statements that are based on management's current expectations with respect to future events or financial performance. Generally, the words anticipates, believes, expects, and other words similar are words identifying forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that could cause anticipated results to differ materially from the actual results. This conference call may also include information that may be considered non-GAAP financial information. These non-GAAP measures are not an alternative to GAAP financial information and may be calculated differently than the non-GAAP financial information disclosed by other parties. The company cautions listeners not to place undue reliance on forward-looking statements or non-GAAP information. Before I turn the call over to Mr. Mininberg, I would like to inform all interested parties that a copy of today's earnings release has been posted to the Investor Relations section of the company's website at www.helenoftroy.com. The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures. The release can be obtained by selecting the Investor Relations tab on the company's homepage and then the Press Releases tab.

Julien Mininberg, CEO

Thank you, Jack. Good morning, everyone, and thank you for joining us. Starting with our second quarter results, today we reported net sales and adjusted earnings per share that came in at the high end of our expectations. I am pleased with the consistency of our results as we work toward returning to growth. I continue to be impressed with how well our organization is executing the ambitious set of initiatives we announced at the beginning of fiscal 2024. This includes delivering our revenue expectations on the majority of our leadership brands and strong performance in international, as well as advancing a wide range of efficiency improvement projects. During the quarter, we made further progress on gross margin improvement and cash flow generation. We significantly expanded gross margins as we realized the benefits of lower inbound freight costs and SKU rationalization. We also generated positive free cash flow as we continue to diligently manage our inventory and deployed a portion of our cash to repurchase approximately $50 million of our shares. For perspective, our initiative to streamline inventory over the past several quarters has resulted in a reduction of over $200 million compared to year-ago levels. The progress on free cash flow has been significant, delivering a $325 million improvement in the first half of this fiscal year versus the first half of fiscal 2023. Our second quarter results not only demonstrate strong execution across our entire organization, they also demonstrate resiliency as we manage through the continued challenging macro consumer environment in which consumers are continuing to shift spending away from discretionary products and more towards discretionary experiences, such as travel and entertainment. That shift in consumer spending patterns has been exacerbated by persistent inflation that forces consumers to make tough choices on all types of spending. Subsequent to the end of the second quarter, we closed on the sale of our office and 400,000 square foot distribution facility in El Paso, Texas as part of our previously announced initiative to improve the efficiency of our assets. We intend to move to a new facility in El Paso to house our US headquarters, which we expect will be a long-term rental property. With El Paso being our largest shared service hub, we expect it to continue to play an ongoing important role for the company and community. We strongly value the work and passion of our dedicated associates in El Paso and are proud of our 55-year legacy in the area. In conjunction with the sale of the El Paso facility, we are also making some organizational moves as part of our ongoing efforts to operate more efficiently. Noel and Brian will provide more detail on these actions during their remarks. Turning to our outlook, we are maintaining our full-year expectations, which include returning to net sales and adjusted earnings per share growth in the fourth quarter of this fiscal year and significant improvements to our gross margin, cash flow, and net leverage ratio. Our outlook includes our expectation of a continued slower economy and pressure on consumer spending levels and patterns, especially for some discretionary categories. During the quarter, we also made significant progress on planning for the future. This includes further progress executing Pegasus, finalizing our next strategic plan, and continuing a smooth transition to Noel as we prepare for her to become CEO in March. I am very pleased by the performance of our team on the Pegasus restructuring workstreams. Pegasus remains nicely on track as we continue executing and delivering its strategic and financial goals. The work of the Pegasus teams reiterates the strength of Helen of Troy's people and culture as we deliver the outcomes needed to help manage through the current challenging macro environment and we believe Pegasus savings will provide significant additional fuel to fund our strategic investments. During our October 17th Investor Day, we will discuss our next strategic plan in detail, which will guide the company's actions during the next era. It is designed to deliver sustainable, profitable growth, create value for our shareholders, and is grounded on our timeless purpose, vision, and values. Before I turn the call over to Noel, I would like to comment on the outcome of our CFO search. Today we announced that Brian Grass, who returned to Helen of Troy as Interim CFO in April, has reached an agreement with the company to remain in the CFO position on an ongoing basis. Noel made a great selection and I believe she and Brian will make a great team as the company embarks on its next chapter following my retirement.

Noel Geoffroy, COO

Thank you, Julien, and good morning, everyone. I'm so delighted to welcome Brian back to Helen of Troy's leadership team on a more permanent basis. We conducted a national search, and I concluded Brian is the ideal choice to partner with me now and when I assume the CEO position next fiscal year. Brian and I have worked closely together since his return in April, and I greatly value his experience and perspective. He is a strategic business leader, a collaborative thought partner, and a proven public company CFO with an extraordinary record of delivering results and creating value throughout his career. We believe his results-oriented mindset and deep company experience will help us deliver for all our stakeholders as we enter our next phase as a growth-oriented company. I know Brian shares my passion, energy, and enthusiasm for the opportunities we have ahead of us at Helen of Troy. As Julien mentioned, our Pegasus initiatives remain on track and have enabled improved efficiency and effectiveness in fiscal 2024. We also expect Pegasus savings will help fuel our brands in fiscal 2025 and beyond. As you may recall, one of the seven major Pegasus work streams is all about streamlining our organization. During the second quarter, we initiated a change that aligns with the creation of the Beauty and Wellness segment. With the sale of the El Paso facility, we determined that this is the right time to geographically consolidate our U.S. Beauty business. Effective in fiscal 2025, our U.S. Beauty business, which is currently in El Paso, Texas and Irvine, California, will move to the Boston, Massachusetts area to co-locate with our Wellness business. This co-location is the next step in the company's initiative to streamline, simplify, and enable enhanced collaboration to deliver greater innovation and realize commercial and product platform synergies between Beauty and Wellness. Now turning to our second quarter business results, as Julien highlighted, our consolidated net sales and adjusted EPS were at the better end of our expectations. In recent months, we achieved market share gains in core categories in a number of our brands including OXO, Osprey, PUR, and Vicks, as well as Braun and Revlon internationally where we have visibility.

Brian Grass, CFO

Good morning, everyone. Thank you, Noel. I appreciate the kind words, but more importantly, your trust. And I echo your sentiments on our opportunity to deliver for all stakeholders. I'm excited to come out of retirement and partner with you in my role as CFO as we enter our next era. I'm looking forward to working alongside you, Julien, and the rest of the leadership team as we look to finish fiscal 2024 strong and launch our next multi-year strategic plan. I hope to see everyone at our Investor Day in a couple of weeks where we will share more of our plan to maximize the opportunities in front of the company and create long-term shareholder value. Moving on to the second quarter. I'm pleased to report results at the better end of our expectations. We significantly improved gross margin, generated strong cash flow and deployed capital to repurchase our shares, while also taking steps to strengthen our balance sheet and further improve our asset efficiency. Consolidated net sales decreased 5.7%, compared to growth of 9.7% in the same period last year or growth of 3.4% on a two-year stack. Second quarter net sales were favorable to the 8% to 6% decline we provided in our outlook in July. As a reminder, our outlook includes expected year-over-year declines from our SKU rationalization efforts and the impact of the Bed, Bath and Beyond bankruptcy. Despite the impacts of higher inflation and interest rates, we are seeing signs that key categories are beginning to stabilize. And we were pleased to drive point of sale growth with expanded distribution, new product introductions, and better supply of inventory. Gross profit margin improved 420 basis points to 46.7% compared to 42.5% in the same period last year, in line with our expectations for the quarter. Year-over-year improvement was due to lower inbound freight costs, the favorable impact of SKU rationalization, lower inventory reserve expense, a more favorable customer mix in Home & Outdoor, and the favorable comparative impact of EPA compliance costs of 130 basis points incurred in the same period last year. GAAP operating margin for the quarter was 9.5% compared to 9% in the same period last year. On an adjusted basis, operating margin declined 120 basis points to 12.7%. The decrease primarily reflects an increase in annual incentive compensation expense, higher marketing expense, increased distribution and depreciation expense due to the opening of our new state-of-the-art distribution facility in Tennessee, unfavorable operating leverage, and a less favorable product mix in Beauty & Wellness. These factors were partially offset by lower inbound and outbound freight costs, a decrease in inventory reserve expense, the favorable impact of SKU rationalization, and a more favorable customer mix in Home & Outdoor. On a segment basis, Home & Outdoor adjusted operating margin decreased 180 basis points to 17.7%, driven by increased annual incentive compensation expense, higher distribution and depreciation expense due to the opening of the new distribution facility, and increased marketing expense. These factors were partially offset by lower inbound freight costs and a more favorable customer mix. Adjusted operating margin for Beauty & Wellness decreased 110 basis points to 7.9%, primarily due to an increase in annual incentive compensation expense, higher marketing expense, unfavorable operating leverage, and a less favorable product mix. These factors were partially offset by lower inbound and outbound freight costs, reduced inventory reserve expense, decreased distribution expense, and the favorable impact of SKU rationalization. Net income was $27.4 million, or $1.14 per diluted share. Non-GAAP adjusted diluted EPS decreased 23.3% to $1.74 per share, primarily due to higher interest expense and lower adjusted operating income. We continued to generate strong cash flow, with cash from operations of $36.7 million in the second quarter. Year-to-date cash flow from operations was $158 million, which is an improvement of $233 million year-over-year. We ended the quarter with total debt of $845 million, which is a slight increase on a sequential basis, despite the repurchase of $50 million of our stock in the quarter. Our net leverage ratio was 2.68 times compared to 2.56 times at the end of the first quarter and 3.16 times at the same time last year. As Julien and Noel mentioned, subsequent to the end of the second quarter, we closed on the sale of our El Paso, Texas distribution and office facility for total proceeds of $51 million. Concurrently, we entered into an agreement to leaseback the office facility for a period of up to 18 months substantially rent-free. We expect to recognize a gain on the sale of approximately $34 million in SG&A during the third quarter of fiscal 2024, of which approximately $18 million will be recognized in Beauty & Wellness and $16 million in Home & Outdoor. Turning to our outlook for fiscal 2024, we are maintaining our full-year expectations for net sales, adjusted EPS, adjusted EBITDA, free cash flow and ending net leverage ratio. We still anticipate a continued slower economy and uncertainty in consumer spending patterns, especially for some discretionary categories. Although we've seen a general decrease in retailer inventory, our outlook includes the expectation of cautious retail ordering patterns during the third quarter and a more normalized ordering in the fourth quarter. We continue to expect consolidated net sales between $1.965 billion and $2.015 billion in fiscal 2024, which continues to reflect the estimated unfavorable year-over-year impacts of SKU rationalization and the bankruptcy of Bed, Bath and Beyond of approximately 3.4% combined. In terms of our net sales outlook by segment, we expect a Home & Outdoor decline of 1.7% to growth of 1% and a Beauty & Wellness decline of 8% to 5.8%. As noted in our earnings release issued this morning, we have updated our expectations regarding Project Pegasus charges. We now estimate lower total pre-tax restructuring charges over the duration of the plan of approximately $60 million to $65 million, which we now expect to be completed during fiscal 2025. This compares favorably to our previous estimate of approximately $85 million to $95 million, which was initially expected to be substantially completed by the end of fiscal 2024. The reduction in estimated restructuring charges is due to a favorable revision in our assessment of the impact of a potential exit from one of our businesses, partially offset by an increase from the Beauty & Wellness geographic consolidation referred to in our earnings release issued this morning. Factoring in the reduction in expected restructuring charges, as well as the gain on the sale of the El Paso facility we expect to recognize in the third quarter, we now expect an increase in GAAP diluted EPS to $6.36 to $7.03 for the full year compared to our previous expectation of $3.81 to $4.67. We continue to expect non-GAAP adjusted diluted EPS in the range of $8.50 to $9.00, which reflects additional year-over-year expense from the restoration of annual incentive compensation expense to target levels, as well as higher interest and depreciation expense totaling approximately $1.77, net of tax. Moving on to our tax outlook, we now expect a GAAP effective tax rate range of 20% to 18% for the full fiscal year and a non-GAAP adjusted effective tax rate range of 14.5% to 13.5%. In terms of quarterly cadence, we now expect net sales growth to be concentrated in the fourth quarter of fiscal 2024 and a decline in net sales of approximately 4% to 2% in the third quarter. We continue to expect to realize the benefits of debt deleveraging and lower inbound freight and product costs more fully in the second half of the year. Accordingly, we expect growth in adjusted diluted EPS in the range of 1.5% to 12% in the second half of fiscal 2024, with that growth highly concentrated in the fourth quarter. The company now expects adjusted diluted EPS to be roughly flat in the third quarter, reflecting the expectation of more cautious retail ordering patterns in the short term, a timing shift in the realization of some cost of goods sold savings into the fourth quarter, and an expected increase in growth investments in the third quarter. We continue to expect capital asset expenditures of between $45 million and $50 million for fiscal 2024, which includes approximately $25 million for the completion of our new distribution facility and the full installation of its state-of-the-art automation equipment. We still expect that the final cost of the facility and its equipment will be largely in line with our original expectations. With lower CapEx needs in fiscal 2024, we continue to expect free cash flow to be in the range of $250 million to $270 million and our net leverage ratio to be between 2 times to 1.85 times by the end of fiscal 2024. In closing, I'm pleased with our business performance year-to-date, which keeps us on track to achieve our full-year financial objectives. I'm encouraged by our progress in advancing key initiatives while navigating the pressured consumer environment as well as the structural headwinds of higher annual incentive compensation, depreciation, and interest expense. Year-to-date, we've improved our gross profit margin by 410 basis points, maintained our adjusted EBITDA margin despite structural headwinds and unfavorable operating leverage, generated $137 million in free cash flow, accelerated debt repayment, and returned capital to shareholders. We also took steps to further strengthen our balance sheet and improve our asset efficiency, culminating with the sale of the El Paso facility after the end of the quarter. We remain excited about the opportunities that Pegasus provides to drive further performance improvement and look forward to sharing our longer-term strategic initiatives and financial objectives with you during our Investor Day. And with that, I'll turn it back to the operator for questions.

Operator, Operator

Thank you. Our first question is from Bob Labick with CJS Securities. Please proceed.

Bob Labick, Analyst

Good morning. Thanks for taking my question and congratulations to Brian. So glad to hear it, we're looking forward to continuing to work with you.

Brian Grass, CFO

Thanks, Bob. Me too.

Bob Labick, Analyst

That’s very exciting and congrats to all on another solid quarter. I wanted to start with one of your last comments there, Brian, about the change in the Pegasus costs, if I wrote it down quickly as a result of the impact of a potential exit from one of your businesses, could you maybe elaborate on that comment or tell me if I heard it correctly?

Brian Grass, CFO

That's correct. In our initial estimates of the restructuring charges, we had accounted for a potential exit from a business currently in our portfolio. We are still evaluating that exit, but after reviewing the opportunities, we have determined that it is unlikely to lead to a restructuring charge. Initially, we thought there might be a range of disposal and exit costs associated with it. However, after updating our assessment, we no longer see that potential and have decided to remove it from the restructuring cost range.

Bob Labick, Analyst

Got it. Thanks. Does that mean we might hear more about this at the upcoming Analyst Day? Or is there another change? Might we learn more soon? What is the timing on when you all will decide?

Brian Grass, CFO

Yes. I mean we continue to work on this project. We do not have anything to report at this point in time. I think it's more likely going to be in the first quarter of fiscal 2025 when we are able to share something with you.

Julien Mininberg, CEO

Yes. Within a year, we'll be on the other side one way or the other. It's good news; it lowers the restructuring charges now. It's good news on a total portfolio basis. We definitely will seek more.

Bob Labick, Analyst

Okay, great. I wanted to revisit my first question regarding the focus on Pegasus. Clearly, there has been significant progress in that area. On the sales side, the new regional marketing organization has been mentioned in the press release, highlighting some distribution gains. Could you provide us with an update on any progress, positive surprises, or challenges you might be facing due to the new North American RMO?

Noel Geoffroy, COO

Yes, of course, Bob. This is Noel. It’s good to hear from you this morning. As you mentioned, the North American regional market organization was one of the most significant changes we made during the Pegasus restructuring. We will elaborate on this further during Investor Day when we have our leader, Ron Andesco, joining us. We made this change to identify distribution opportunities across our portfolio, focusing on customers where we could utilize some but not all of our brands, and to explore scaling our presence with them or targeting new customers and distribution channels specifically with this organization. We have started to see some initial successes, like increasing shelf space in beauty at mass retailers and expanding distribution with Family Dollar for PUR, which I mentioned today. I believe we'll continue to observe these positive developments in the latter half of this year, particularly in the fourth quarter, which contributes to our confidence looking ahead. As for challenges, the main issue tends to be the usual settling-in period when an organization undergoes changes and people start reporting to new leaders. However, I have been quite pleased with how well the teams are coming together. The leadership team was formed about a week ago, and we had a national sales meeting a couple of months ago. The energy and enthusiasm from this team as a unified organization have been impressive.

Julien Mininberg, CEO

Yes. Despite the restructuring, continuity is intentional as the leadership team remains largely the same. This stability allows for adaptation, and the market perceives our scale and various methods effectively. Additionally, business units are becoming even more consumer-focused, leading to greater innovation and a sharper focus on meeting the needs of shoppers.

Bob Labick, Analyst

Could you provide an update on new product introductions moving forward in comparison to past efforts? As you mentioned, we are on the verge of resuming growth, and I believe that innovation plays a significant role in this. What is your perspective on the innovation pipeline and the expectations for new product launches compared to previous performances?

Noel Geoffroy, COO

Yes. Certainly, we continue to feel innovation is very important in all of our segments, both in new product innovation as well as what I call commercial innovation, new claims, new ways to position our brands and our products in the marketplace or new ways of reaching the consumer from a marketing standpoint. So I continue to see a lot of emphasis on that. In fact, as Julien just mentioned, that was one of the reasons we went with the organization structure we did. We've got business units now fully focused on consumers, brands, and innovation so that we can take that to the next level, and that is underway. We've got some great innovation in the market now. OXO has always had some terrific innovation the Grilling Prep and Carry, the fridge organizers that have come out this year, continued coffee. Innovation has been strong. Osprey continues to go into adjacent categories like travel. We've also put out in the market. It's not quite out for sale yet, but announced launches in the bike for Osprey, which is a really interesting new venture for that brand. Hydro Flask, of course, we launched the soft launch for the travel tumbler in the last quarter. We've now ramped up distribution there and just launched a new Hydro Flask sport bottle that's a unique shape. And then across the Beauty wellness portfolio, many new formulas on Drybar and Curlsmith in particular, addressing a lot of consumer needs. So we continue to have really a lot of innovation across the portfolio, and I continue to anticipate more of that on both the product and the commercial side going forward. And we'll talk more about that in our Investor Day on the 17th as well.

Bob Labick, Analyst

Super. Thank you so much.

Noel Geoffroy, COO

Yes. Thanks. Bob.

Operator, Operator

Our next question is from Rupesh Parikh with Oppenheimer. Please proceed.

Rupesh Parikh, Analyst

Good morning and thank you for my question. I wanted to revisit your comments about inventory destocking. Could you elaborate on the categories you are observing across the trade? Also, how confident are you in returning to a more normalized inventory ordering in Q4?

Brian Grass, CFO

We are focusing on refining our quarterly processes, and as we gain more visibility, we are noticing cautious ordering patterns in the short term as retailers consider factors like the impact of student loans. Many retailers are closing their fiscal years around December and January. From our perspective, retail inventory levels are generally low, which is why Q4 ordering patterns align more closely with those from the first half of the year. I want to clarify that when we mentioned "more normalized" in the press release, we meant it is more in line with the first half of the year, although we anticipate Q3 to be slightly lower than that. It's important to note that Q3 shows a decline of 10.6% compared to the previous year, while Q4 shows a 16.7% decline, which explains why we expect Q4 to perform better against that backdrop. We have experienced some isolated supply shortages on certain components that we believe will negatively impact Q3 but will certainly benefit Q4 as we resolve those issues. Additionally, we have secured distribution gains earlier in the year that will contribute more significantly in the latter half of the year, particularly in Q4. We have also increased our marketing investments in Q2 and plan to invest even more in Q3, which we highlighted when discussing our EPS guidance. We expect these marketing efforts to drive better results in Q4. Overall, we view this as an improvement in our quarterly rhythm as we gain more clarity and move through the year.

Rupesh Parikh, Analyst

No, that's helpful. So it sounds like the overall demand backdrop is fairly consistent with what you guys thought maybe last quarter for the full year. Is that a fair characterization?

Brian Grass, CFO

I think it's fair. There's obviously puts and takes and a lot of shifting and moving around. But generally speaking, I'd say that's fair.

Noel Geoffroy, COO

Yes. Generally, we observe that consumers are making deliberate choices about their spending, which aligns with our expectations as we entered this year. Therefore, we do not anticipate significant changes in their behavior as they consider factors like inflation and student loan repayments, as mentioned by Brian. We expect this trend to continue into the latter half of the year.

Rupesh Parikh, Analyst

Great. Thank you. I’ll pass the line.

Operator, Operator

Our next question is from Susan Anderson with Canaccord Genuity. Please proceed.

Susan Anderson, Analyst

Hi. Good morning and let me send my congrats to Brian, too. It's nice to have you on board. I guess maybe just as you look at the Beauty business, it sounded like hair tools are starting to rebound, particularly at mass with Revlon. I'm curious what you're seeing kind of in the prestige category, particularly Drybar and if you're seeing any rebound there? And then what you're thinking about new innovation in the category in the back half?

Noel Geoffroy, COO

Yes, Susan. It's great to hear from you. In the Prestige segment, we are seeing positive momentum in our liquids business, which I previously mentioned includes several innovations that are performing particularly well. Our tool business has some innovations as well, but it isn't as strong as the liquid business at the moment. Consumers seem to be more selective about their spending, and we're noticing more activity in liquids. Our thickening spray and first control spray are examples of products that are performing well. I anticipate that we will see more innovations in tools in the future, but currently, the liquids are our strongest performers.

Susan Anderson, Analyst

Okay. Great. And then maybe just a follow-up on just kind of the cadence of the sales and inventory levels. I'm curious how comfortable you're feeling about inventory levels at retail. I think last year, obviously, we had a lot of consolidation. I guess how are you feeling going into the holiday season just in the channel in general?

Noel Geoffroy, COO

Yes, I would say inventory levels are currently not very high in retail. They are relatively low and somewhat aligned with consumer consumption. We have observed that in certain seasonal categories like cough and cold, some retailers are opting for less loading in the second quarter and are instead planning for more replenishment in the third and fourth quarters for products like Vicks humidifiers and consumables. The positive aspect is that we have ample supply this year, more than in the previous year, so we are prepared for those orders when they arrive. Regarding the holiday season, we continue to see strong interest in Drybar and Curlsmith kits, which traditionally perform well during this time. The combination of tools and some of these new liquids that are performing well is what we are focusing on and gaining good traction with retailers, particularly for our gift holiday offerings.

Susan Anderson, Analyst

Okay. Great. That's helpful. And then I guess just last, just on kind of the M&A environment. And as you guys get closer to that 2-time leverage target, how are you feeling about potentially being able to buy something again? And just curious if you're seeing any attractive opportunities out there?

Brian Grass, CFO

I think that our leverage is coming down in line or maybe even slightly ahead of our expectations. So that's positive and puts us in a good position. I think as we end the year and get below 2 times, we're definitely in a position to be able to make an acquisition. But the other part of your question is, what are we seeing out there? I would say there is a flow of assets being available, but not a lot that meet our criteria. I would say the market is not strong in that regard currently in terms of quality assets that we would seriously consider that meet our criteria.

Jack Jancin, Senior Vice President of Corporate Development

I think Brian's got it just right. There is more flow starting to come in versus what it's been in the last six months. But items or assets that fit the criteria are things that we are looking for. We're not seeing those yet, but we're going to continue to look, and when we find it, we would certainly lean into one when the time is right and inventory is ready.

Julien Mininberg, CEO

You've seen us before, Susan is dulling here and high, we're picky. So as prices come down in the market, the equilibrates all that you just heard we’re not eager dependence on the wrong asset. We're excited to find the right one, and we're quite picky on such.

Susan Anderson, Analyst

Okay. Great. Thanks so much everyone. That’s really helpful. Good luck next quarter.

Julien Mininberg, CEO

Thank you.

Operator, Operator

Our next question is from Olivia Tong with Raymond James. Please proceed.

Olivia Tong, Analyst

Thank you. Good morning. I have a couple of clarification questions to start. Regarding the sell-through, I want to clarify the difference between Q3 and Q4. Is the decrease in Q3 because retailers anticipate lower sales and are adjusting their orders accordingly, while the inventory remains unchanged? Or are they intending to carry less inventory because they believe they don’t need as much to support sales?

Brian Grass, CFO

Yes. I believe it could be a mix of both. Retailers are likely forming expectations about demand while being cautious in their ordering based on what they observe. There is also a general trend of them wanting to maintain lower inventory levels. I’m not suggesting there are significant changes in weeks of inventory, but they appear to want to reduce their exposure to risk as they conclude their fiscal year. So, it's a combination of these factors, but I want to emphasize that we're not seeing drastic inventory adjustments like we did last year. The changes are more subtle. However, these small adjustments are significant enough for us to revise our revenue guidance for the third quarter. While the impact isn’t large, it is enough to alter our projected revenue by 2 or 3 percentage points for the quarter.

Julien Mininberg, CEO

Yes, the guidance indicates that the second half will deliver exactly as we projected, along with the positive news shared today about Q2. I believe that those reviewing the stock price may be focused on concerns regarding pressure in the latter half. What we are conveying, as Brian mentioned, is that there is a reallocation of the timing between Q3 and Q4, and we are reaffirming our full-year results.

Olivia Tong, Analyst

Got it. And then just sticking on the outlook. The full year outlook is still a pretty wide range considering we're past the midpoint of the year you've historically tried to narrow that a bit by this time. And you've already obviously talked about the line of sight on Q3 versus Q4 cadence. So perhaps can you provide just maybe some goalposts on what's embedded at the low end versus the initiatives that potentially gets you to the high end of the range.

Brian Grass, CFO

Yes, I think that’s a valid point. There are many factors in the macro environment that could influence our results. Considering all of this, including recent developments, we decided to maintain our range, albeit a wide one, particularly for Q4. Historically, we aim for the high end of our ranges, and that remains our focus. However, given the current uncertainties, it makes sense to keep a broad range to accommodate various changing factors in the latter half of the year. We are optimistic about our forecast and have taken into account potential downsides while also allowing for upside if we successfully execute our strategic initiatives. I'm not sure if you have any follow-up questions about the key factors influencing our Q3 and Q4 performance.

Olivia Tong, Analyst

Got it. Thank you.

Operator, Operator

Our next question is from Peter Grom with UBS. Please proceed.

Peter Grom, Analyst

Thanks, operator. Good morning, everyone. So I apologize if I missed this, Brian, in your remarks. But is the expectation for full year gross margin to still be around this 48%? And if so, can you maybe speak to the phasing from a gross margin perspective given the more challenged 3Q outlook? And I guess what I'm really trying to get at here is if that's still the expectation that it's more weighted to the fourth quarter, which seems to be the case given the change in the outlook in terms of phasing, like how does that inform your view on the gross margin potential for the business as you look out to fiscal 2025, particularly as Pegasus savings continue to build?

Brian Grass, CFO

Yes, good question. We expect to finish the year with a slightly lower gross profit margin than previously guided, mainly due to shifts in the mix of margins across our revenue streams. However, we are not worried about any structural issues and have no concerns for fiscal year 2025. We still have the capability to improve our gross profit margin as discussed with Pegasus, and we’ll see that effect carry into fiscal year 2025. Additionally, we are benefiting from freight and commodity savings in the second half of fiscal year 2024. The one percentage point decrease in our overall gross profit margin expectation is primarily a result of changes in the margin mix within our portfolio.

Julien Mininberg, CEO

Peter, we remain confident in our ability to build on our current progress, especially considering your comments about Pegasus. As Pegasus has gained momentum, it's important to note that 60% of the savings are derived from cost of goods related projects. Noel has confirmed that Pegasus is progressing well. With such a significant portion of the savings linked to cost of goods, we are assured that we will not only maintain the gross margin gains we've mentioned for fiscal 2024 but will also continue to build on them into fiscal 2025 and 2026.

Brian Grass, CFO

Peter, you asked a question about cadence. So I would say, roughly speaking, if you want a platform off of Q2, maybe 0.5 percentage points around that in Q3 and then 1.5%, maybe a little bit higher in Q4; that's kind of the cadence of the increase in gross profit for the remainder of the year.

Peter Grom, Analyst

Thank you. I just need a clarification on that. Is the 50 basis points compared to Q2, so that would make it 150 basis points in relation to Q3, or is it in comparison to the Q2 number? I just want to be clear.

Brian Grass, CFO

So the 50 basis points is relative to Q2. So like you said, low 47 and then say 1.5 points on top of that for Q4.

Peter Grom, Analyst

Okay. Yes. I was just making sure it was the 47, we're building the point half off of the low 47, not off of the Q2 number. And then just a last question for me, just like more bigger picture. I mean Brian, you're pretty clear that you've embedded enough cushion in your guidance. But I would just be curious, it's been a pretty challenging environment to kind of predict what is going to happen. How would you characterize your visibility, right? I mean we're not that long ago where you were kind of expecting a return to revenue growth in 3Q and that kind of didn't play out. So I guess I would just bigger picture question. How much visibility do you think you have at this stage as you look out to 4Q and into next year?

Brian Grass, CFO

Overall, I think it's positive. I understand your concern about the changes we made in Q3, which reflect our effort to stay connected with our retailers and respond to their feedback. We can't accurately foresee retailer adjustments at the start of the year. What it demonstrates is our responsiveness to our retailers' needs. Some are concentrating on student loan repayments while others are not, adding complexity that we need to understand. It's not accurate to assume all retailers are making the same adjustments. This situation illustrates our commitment to staying attuned to the market and acting on insights as soon as they become available. Hopefully, this provides some reassurance since, at the year's outset, we could not have anticipated these developments or the varying responses from retailers. Given the numerous macro factors at play, I believe we are navigating our forecast and visibility to the best of our ability.

Peter Grom, Analyst

Got it. Thank you so much Brian.

Operator, Operator

Our final question is from Linda Bolton-Weiser with D.A. Davidson. Please go ahead.

Linda Bolton-Weiser, Analyst

Yes. Hi. So I was curious about your view on putting some cash towards share repurchase versus further debt repayment. And knowing the macro environment and some of these things going on that you just talked about, it's a little surprising that you did the share repurchase already $50 million. I guess, I'm just kind of wondering, have you used all your ammunition? Or is there some ability to do more here with the stock down 9%. Maybe you could just comment on your thoughts there?

Brian Grass, CFO

No, I don't think we've used all our ammunition, and we think that the share repurchase was a good investment. And the primary thinking is that even with the repurchase of our shares, we were still able to get to the better end of our leverage target by the end of the year of 1.85 times. And so we thought it was a great thing to do to return some capital to shareholders. We also had a reasonable view on the sale of our El Paso facility and the proceeds that that would generate, which was also factored into the thinking and helps us be in a very strong balance sheet position to be able to do it. So I view it as a win-win. We're able to get at the very low end of our leverage target for the year, and we were able to repurchase shares. To me, those are both positive.

Julien Mininberg, CEO

In terms of timing, I couldn't agree more. Remember, we're going for the long game. I know a lot of people on this call are too. We like our prospects a lot. I think of the basics. Distribution is growing. Investment fuel from the Pegasus savings gives us the ability to not only expand margin but also to invest in further drive from innovation and the other basic flywheel drivers in the company. That has the ability to expand not just profitability but revenue, which creates operating leverage, do that at a higher gross margin, do it all at a sweeter mix, so to speak, from a profit standpoint, gives room for acquisition and as should you see growth in the company and more acceleration of the flywheel, we believe the answer is yes. So the short term that Brian described it creates opportunity lower leverage ratio below 2 times, that he's talking about certainly means that we haven't spent our allocation for this depending with the market, the market is skittish right now, and yet that long-term proposition is fundamentally sound and exactly our expectation and plan makes you want to buy stock, at least for us.

Linda Bolton-Weiser, Analyst

Okay. That’s it from me. Thank you.

Noel Geoffroy, COO

Thank you, Linda.

Operator, Operator

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Julien Mininberg, CEO

Yes. Well, thank you, operator, and thank you, everybody, for joining us today. We're very pleased with the quarter and to be in a position to reiterate our guidance for the full year outlook for fiscal 2024. We look forward to speaking with many of you later this week as we make our various calls and also providing detail on our longer-term strategy during our Investor Day on the 17th of this month. So with that, I'll simply say thanks very much and have a wonderful day.

Operator, Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.