Earnings Call Transcript - HELE Q2 2025

Operator, Operator

Greetings, and welcome to the Helen of Troy Second Quarter Fiscal 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Sabrina McKee, Senior Vice President of Business Development and Investor Relations. Thank you. You may begin.

Sabrina McKee, Senior Vice President of Business Development and Investor Relations

Thank you, operator. Good morning, everyone, and welcome to Helen of Troy's second quarter fiscal 2025 earnings conference call. The agenda for the call this morning is as follows. I will begin with a brief discussion of forward-looking statements. Ms. Noel Geoffroy, the company's CEO, will comment on business performance and then provide some perspective on current trends. Then, Mr. Brian Grass, the company's CFO, will review the financials in more detail and discuss our outlook. Following this, we will open up the call for Q&A. 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 anticipate, believe, expect, and other similar words are worth 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 Ms. Geoffroy, I would like to inform all interested parties that a copy of today's earnings release and related investment deck has been posted to the company's website at www.helenoftroy.com and can be found by navigating to the Investor Relations section of the site or by scrolling to the bottom of the homepage. The earnings release contains tables that reconcile non-GAAP financial measures to the corresponding GAAP-based measures. I will now turn the conference call over to Ms. Geoffroy.

Noel Geoffroy, CEO

Thank you, Sabrina. Hello, everyone, and thank you for joining us today. I am pleased to report second quarter results that were above expectations. During the quarter, we took decisive actions toward our long-term strategic initiatives, including strengthening the core and further shaping our growth portfolio. In addition, despite persistent macro headwinds, we are generating results on our efforts to reset and revitalize our business, which we believe indicates we are on the right path to improve our operating performance. Through our increasingly data-driven approach, we continue to see improvement in our brand fundamentals. Project Pegasus continues to be on track and is generating critical fuel for reinvestment in our brands. This fuel, combined with our sharper brand fundamentals, is leading to stronger marketing with new creative, more agile media campaigns, better innovation, and better execution. We are also continuing to grow our distribution. Fiscal year-to-date, we meaningfully grew our U.S. weighted distribution by 9% year-over-year, making our brands increasingly available where our shoppers shop. All of these efforts contribute to improved market share performance, with eight of our key categories growing or maintaining share this fiscal year-to-date in our U.S. measured channels. Now to share an update on shaping our portfolio. We have previously shared that we were engaged in an active process to divest the business. Shortly after the end of the quarter, we opted to pause that process as the offers we received are not indicative of the value of the business or its potential. We will continue to consistently evaluate our brands to ensure we position the company for long-term success and growth. Our acquisition strategy remains to look for brands with strong global growth potential, are financially accretive, and meet our Better Together criteria. We will remain disciplined in our approach to both divestitures and acquisitions to ensure we are able to deliver on our commitment to increase shareholder value. Before I turn to the results for the quarter, I will provide an update on the Curlsmith and Tennessee distribution center operational issues. As previously discussed, we resolved the Curlsmith ERP integration issues. In the second quarter, we successfully integrated Curlsmith into our distribution network ahead of plan. With respect to our Tennessee distribution center, I am pleased to share that we consistently improved our shipping execution and operating efficiency throughout the quarter and have now addressed the root causes of the technology issues we experienced. We are now servicing customers and consumers in line with our expectations and anticipate reaching our productivity goals by the end of the fiscal year with a continued eye on best-in-class service. Now let's turn to performance across our portfolio. Overall, we see our Home & Outdoor performance strengthening, our Wellness performance ahead of our expectations, and our International performance remains a bright spot. Our Beauty performance was below our expectations for the quarter, but we are taking focused actions to improve the fundamentals of the business and its brands. Starting with Home & Outdoor. OXO grew share fiscal year-to-date in core kitchen utensils, a category that we see as largely normalized post-pandemic. The brand achieved strong sell-through at Walmart following the June expansion into 3,200 stores and over a five times increase versus the test, with additional distribution coming soon. OXO is also gaining momentum in dry food storage with share growth fiscal year-to-date. OXO also continued strong momentum in coffee. Shortly after the end of the quarter, OXO launched our new portable Rapid Brewer coffee maker, which makes hot coffee or cold brew in five minutes or less. It has already earned positive reviews from Food & Wine and Consumer Reports. As I will discuss in more detail later, International performance, especially in EMEA, is also strong for OXO. Hydro Flask outperformed our expectations and is a key example of brand revitalization across innovation, distribution, and marketing. We still have many areas of opportunity, but are encouraged by our meaningful progress across all key focus areas. The new Travel Bottle was launched in the second quarter and provides consumers with the best of both worlds, the utility of fitting in most car cupholders or backpack pockets, and it is leak-proof. The new bottle comes with your choice of a Hydro Flask flip straw or chest cap, along with a convenient carrying strap. Hydro Flask also successfully launched into Costco, a key retailer for expanded target consumers. The brand also benefited from strong distribution internationally with sales up in all key markets. Hydro Flask launched a new brand campaign called, We Make It, You Own It. The campaign celebrates the individuality of the Hydro Flask consumer and highlights the broad array of products, configurations, and colors we offer for a wide range of consumer preferences and occasions. The brand also showed great consumer obsession and marketing agility this quarter by being a part of two relevant cultural moments, Brat Summer and the MTV Video Music Awards. Music artist Charli XCX launched her Brat Album in June with an iconic lime green album cover, leading Gen-Z to christen the summer as the Brat Summer, which was typified by Cool Girl style and Lime Green Everything. Hydro Flask quickly created a Brat Summer water bottle that we promoted on our social media account. Our Instagram post achieved Hydro Flask's highest year-to-date engagement rate, drove a double-digit lift in sales around the post, and gained the attention of Charli XCX, leading to a new partnership for her current concert tour and great overall exposure for the brand. Our second cultural moment came in late summer when the VMA's Best New Artist winner walked the red carpet and sat in the front row with a custom Hydro Flask in hand. Social engagement on that post has now eclipsed our Brat Summer post. These are two great examples of moving at the speed of culture, which is critical to driving relevance with our target consumer. Turning to Osprey, the brand is maintaining its leading share in U.S. technical packs even as that category softened. Osprey continues to extend into exciting new adjacencies. A great example that is rooted in consumer obsession is Osprey's new photography accessories line. After years of consumers asking us for photography gear, and extensive research and testing by Osprey, we launched our new photography accessories line in July. The line is built around the PhotoLid, an innovative padded camera case that supports active photographers and content creators and is designed to replace the removable top lid on most backpacks while also offering accessible and protective storage for photo gear. The new line has received strong consumer engagement and a tremendous response from the industry, earning Gear Junkie's Best in Show award from the Outdoor Market Alliance Show. In Everyday and Lifestyle packs, Osprey is having strong success with its daylight line, which is driven by new color designs, Osprey's high-quality materials and durability, and an affordable price point that caters to consumers in the current economic environment. This line continues to offer extended distribution opportunities for the brand. Now turning to Beauty & Wellness. Our Wellness business performed above our expectations with particular strength in fans and thermometry. As widely noted by the media, illness rates in the U.S. increased through July and much of August, and both Braun and Vicks thermometers saw higher point-of-sale. Fiscal year-to-date, while the thermometry category overall has remained relatively flat, Braun and Vicks have outperformed and gained share. They remain the number one and number two brands in the U.S., respectively. We also gained new or expanded distribution on Braun thermometers at CVS, Costco, and Walmart, in addition to Braun blood pressure monitors in Walmart. In humidification, while the category remains soft, Vicks has maintained its number one share position. As we enter the peak cough, cold, and flu season, our inventory is well-positioned to serve customers and consumers as the season progresses. In water filtration, we are also seeing positive point-of-sale for PUR at Walmart, where the brand has been growing its presence. For Beauty, we continue to see softer point-of-sale across the brand portfolio and are taking actions to revitalize the brands and lean in where we see meaningful opportunities, leveraging consumer insights and our new brand-building frameworks. We also recently added new leadership with fresh perspective to help set this business up for long-term success. I mentioned the new Drybar marketing campaign last quarter as an example of where we are evolving our marketing content and targeting with the support of our marketing center of excellence. We began the rollout of that new Drybar Polyglamorous campaign in July. This is a bold and fun repositioning of the brand that focuses on Drybar's more than 80 hairstyling products and complementary tools that allow consumers to dabble, tease, and play. The campaign has been very well received with social media engagement over twice the historic rate. We continue to see market opportunity for our hair products. We are pleased that Curlsmith is gaining market share in the fast-growing Prestige Hair Liquids category fiscal year-to-date. This quarter Curlsmith launched Shake & Shine Refresh Mist, which is crafted to refresh, moisturize, and define curls to extend the result of a wash day. In addition, Curlsmith earned an Allure Best Beauty of 2024 Award for Frizz Control Cleanser and Frizz Control Duo Conditioner. Last quarter, we extended our popular Drybar Liquid Glass product line, and we followed that up this quarter with additions to our thickening line, Drybar Big Brew. Revlon remains the unit share leader in hot air stylers fiscal year-to-date, and we have sold three times more Revlon One-Step Volumizers than the next largest competitive item. This month, we launched a new marketing campaign to appeal to savvy consumers who want salon-quality results without breaking the bank. The value reframe highlights that on average, Revlon retails for a tenth of the price of a Prestige competitor for similar results. We also continue to see strong momentum with the Revlon portfolio at Walmart, where consumers appreciate great care tools at accessible price points. Internationally, our businesses performed well with sales up almost 5% and all key regions contributing to the positive growth. Home & Outdoor outperformed our expectations and grew in all key international markets, driven by expanded distribution and greater collaboration between the brand and sales teams. In the U.K., you'll find a Drybar pop-up not only in Boots Battersea in London, but also onboard the Harrods tour bus as part of an exclusive multi-branded campaign where consumers were treated to a styling. Curlsmith launched in select Sephora and Boots stores in the U.K. and Hydro Flask expanded into GO Outdoors flagship stores. OXO has expanded at John Lewis, Leeds, in the U.K., has a beautiful pop-up in BHV Marais, one of Paris' most famous department stores in the heart of the city, and expanded its retail footprint in Japan. Osprey is well represented in Germany with a large display at Sport Schuster, Munich's leading sporting goods retailer. These are just a few examples of how we are increasing our global footprint. Stepping back, I remain confident that the reset and revitalized building blocks we discussed last quarter will prove to be a solid foundation for the future, but we know that change of this magnitude takes time. We remain committed to our strategic choices, growing our portfolio through consumer obsession, being and winning where our shoppers shop, fully leveraging our scale and assets, and embracing next-level data and analytics in everything we do. We are making significant progress on the road back to sustainable long-term top line growth, and you heard evidence of that today. I want to thank our exceptional global associates across Helen of Troy for their dedication and passion for our company and brands. Now I will turn it over to Brian.

Brian Grass, CFO

Thank you, Noel. Good morning, everyone. I'm pleased to report second quarter results that were slightly above the high end of our expectations for net sales, adjusted EPS, and adjusted EBITDA. As Noel mentioned, we substantially completed the remediation efforts related to the automation system at our Tennessee distribution facility with minimal impact to sales in the quarter. We believe that we are now in a position to achieve targeted efficiency levels by the end of fiscal '25. We also rightsized our cost structure in line with our fiscal '25 net sales expectations, while maintaining our planned incremental growth investment, an increase of approximately 165 basis points year-over-year in the second quarter. While we know we have more work to do to achieve our long-term goals, we believe these results represent solid progress considering the executional challenges we overcame in the quarter. I'll now move on to a more detailed discussion of our second quarter results. Consolidated net sales declined 3.5%, slightly ahead of our expectations as the second quarter sales impact from automation challenges at our Tennessee distribution facility were less than originally expected. The sales decrease was primarily due to a decline in Beauty & Wellness, reflecting lower sales of hair appliances, air purifiers, and humidifiers, primarily driven by softer consumer demand, reduced replenishment from retail customers, and a strong competitive environment in hair appliances and air purification. Home & Outdoor grew almost 1% year-over-year, primarily due to improving trends in OXO and Hydro Flask, partially offset by a slight decline in Osprey. Our International business continues to perform well with sales growth of almost 5%. Consolidated gross profit margin was 45.6%. The 110 basis point decrease was primarily due to a less favorable product and customer mix within Home & Outdoor and unfavorable inventory obsolescence expense year-over-year. These factors were partially offset by lower commodity and product costs, partly driven by Project Pegasus. GAAP operating margin for the quarter was 7.3% compared to 9.5% in the same period last year. On an adjusted basis, operating margin decreased 290 basis points to 9.8%. The decrease was primarily driven by the planned incremental growth investment of 165 basis points I referred to earlier, and an estimated 85 basis point impact from additional costs associated with automation start-up issues in our new distribution facility. Decline also reflects the lower gross profit margin and the impact of unfavorable operating leverage. These factors were partially offset by lower overall personnel expense and the lower commodity and product costs I referred to earlier. On a segment basis, Home & Outdoor adjusted operating margin decreased 270 basis points to 15%, primarily due to unfavorable distribution center expense, a less favorable product and customer mix, and planned incremental growth investment. Adjusted operating margin for Beauty & Wellness decreased 350 basis points to 4.4%, primarily due to planned incremental growth investment, unfavorable inventory obsolescence expense year-over-year, and the impact of unfavorable operating leverage. Our tax rate in the second quarter was 22% compared to 17.9% last year. The year-over-year increase was primarily due to the impact of our Barbados tax legislation enacted during the first quarter of fiscal '25, shifts in the mix of income in our various tax jurisdictions and an increase in tax expense for discrete items. Net income was $17 million or $0.74 per diluted share. Non-GAAP adjusted diluted EPS was $1.21 per share, reflecting lower adjusted operating income and an increase in the adjusted effective tax rate, partially offset by lower weighted average diluted shares outstanding and a decrease in interest expense. Free cash flow was $39.7 million, an increase of $11.7 million year-over-year but slightly below our expectations for the quarter due to higher working capital needs. We ended the second quarter with total debt of $713 million, a sequential decrease of $35 million compared to the first quarter. Our net leverage ratio was 2.34 times compared to 2.37 times at the end of the first quarter. At the end of the second quarter, our Board authorized the repurchase of $500 million of our outstanding stock in keeping with our intention to return capital to shareholders not otherwise deployed for core business growth or strategic acquisitions. The authorization was approved as part of the Board's regular process of reviewing our capital allocation and existing authorization. Turning now to our outlook for fiscal '25, we are maintaining our expectations for consolidated net sales, adjusted EPS, and adjusted EBITDA, and have updated our expectations for sales by segment, free cash flow, and ending net leverage ratio. We remain cautious as external headwinds of increased promotional activity, softer and more variable retail replenishment, and macro pressure and uncertainty remain. While the Federal Reserve's move to begin lowering interest rates will likely provide relief for some, we believe that the benefit will take some time to cycle through to many consumers. We also expect a year-over-year headwind from a shorter holiday shopping season between Thanksgiving and Christmas this year. We continue to expect net sales between $1.885 billion and $1.935 billion, which implies a decline of 6% to 3.5%. This includes the unfavorable impact to net sales of approximately $8 million due to the shipping disruption from the automation startup issues at our distribution facility and the Curlsmith ERP integration challenges in the first quarter. In terms of our net sales outlook by segment, we now expect a Home & Outdoor decline of 2.3% to growth of 1.4%, which includes the impact of shipping disruption in our Tennessee distribution facility during the first quarter, and a Beauty & Wellness decline of 9% to 7.5%, which continues to include a year-over-year headwind of approximately 1% related to the expiration of an out-license relationship with respect to one of our Wellness brands. We continue to expect GAAP diluted EPS of $4.69 to $5.45 for the full year and non-GAAP adjusted diluted EPS in the range of $7 to $7.50, which implies an adjusted diluted EPS decline of 21.4% to 15.8%. We continue to expect full-year adjusted EBITDA of $287 million to $297 million, which implies margin compression of approximately 150 basis points to 160 basis points year-over-year with approximately 50 basis points coming from the automation start-up issues at our distribution facility. We continue to incrementally invest back into product innovation and marketing for the long-term health of our business and our brands and continue to plan for a year-over-year increase in growth investment spending of roughly 100 basis points. We continue to expect some gross margin compression given our expectation of a more promotional environment and a less favorable sales mix. However, we still expect to expand gross margin year-over-year due to Project Pegasus. Finally, we anticipate lower operating leverage from the decline in revenue, which we expect to be offset by the rightsizing of our cost structure that we began to implement in the second quarter. Our first quarter interest expense outlook included the expectation of 225 basis point reductions for the remainder of fiscal '25, which now largely aligns with the Fed's 50 basis point reduction in September, and we have assumed no further rate reductions for the remainder of fiscal '25. As such, our full-year interest expense expectations remain unchanged. We expect a GAAP effective tax rate range of 27.3% to 29.5% for the full fiscal year and a non-GAAP adjusted effective tax rate range of 20.7% to 21.3%. We now expect capital and intangible asset expenditures of between $32 million and $37 million for fiscal '25, which includes remaining equipment and technology of $11 million to $12 million associated with our Tennessee distribution facility. We now expect free cash flow in the range of $180 million to $200 million, which implies a free cash flow yield of 12.7% to 14.1% using Monday's closing share price. Our lower free cash flow expectations for fiscal '25 reflect a slower start to the year and revised estimates for working capital and CapEx needs to support the continued improvement in our operating trends and opportunities we see for the remainder of the year. We now expect net leverage ratio as defined in our credit agreement to be between 1.9 times and 1.8 times by the end of fiscal '25. In terms of cadence, for the third quarter of fiscal '25, we expect net sales decline in the range of 4.5% to 1% year-over-year and adjusted diluted EPS decline in the range of 10% to 3% year-over-year. As we look towards fiscal '26, we thought it beneficial to provide an update on our efforts to diversify our production outside of China and mitigate the impact of potential incremental tariffs in the future. With the first step of this strategy, we have reduced our exposure to incremental tariffs to a range of 25% to 30% of consolidated cost of goods sold. We are now launching the second step of our strategy, which targets a further reduction to our exposure by the end of fiscal '26. We plan to share more on this important initiative when we provide our fiscal '26 outlook this coming April. Finally, I'd like to update you on the process to divest one of our businesses. After a thorough and rigorous process that included both strategic and private equity bidders, we have decided to put the process on hold until further notice. We feel the valuation and structure of the offers we received were not reflective of the current health of the brand and future potential of the business. Year-to-date, the business has performed largely in line with expectations. We believe there is potential to further improve its performance. We intend to continue to consistently evaluate our portfolio to ensure our assets position us for long-term success. In closing, I am pleased with the progress we are making to reset and revitalize our business in fiscal '25 and believe this will position us well to improve our core and achieve our long-term objectives. Our Project Pegasus initiatives are on track and are fueling a step-level increase in brand and innovation investment. We have invested more in data-driven decision making and capabilities to leverage that investment more efficiently. We will continue to use our free cash flow to deploy capital using a balanced approach, which we believe can drive significant accretion, whether we pay down debt, repurchase our shares, or make strategic acquisition. And with that, I'll turn it back to the operator.

Operator, Operator

Our first question comes from Peter Grom with UBS. Please go ahead with your question.

Peter Grom, Analyst

Thank you, operator, and good morning, everyone. I hope you're all doing well. My first question is about the quarter and the path forward. You highlighted many positive developments across the portfolio, but when considering the upside this quarter, can you break down how much of that was due to improved category performance versus the innovative actions you mentioned? Looking ahead, what is the current outlook regarding the category? Last quarter, it seemed like you were expecting the conditions from May to continue. Can you share what you foresee from a category perspective in your current outlook?

Noel Geoffroy, CEO

Yes, thank you, Peter. It's great to hear from you. Overall, as we evaluate the remaining part of the year and our performance across different categories, I would say there are various dynamics at play. However, as I mentioned earlier, I am genuinely pleased with the performance of several of our brands. We have been diligently working on establishing brand-building frameworks, deeply understanding our target consumers, and making incremental investments in our brands. As a result, we are launching many new products, such as the Hydro Flask Travel Bottle, the OXO Rapid Brewer, the Big Brew extensions, and new offerings from Curlsmith. Throughout our portfolio, we have a wealth of new products making a positive impact. Additionally, we've achieved distribution gains, with Hydro Flask performing well at Costco and OXO continuing to excel at Walmart. I am pleased to see the results of the efforts we've put into all our brands. In terms of categories, it’s a mixed situation as we operate in several areas. Some categories, like dry food storage, are still experiencing softness, while others, such as kitchen utensils and thermometers, have leveled off. There’s still some softness in technical packs, and the core outdoor category remains somewhat weak. However, we are maintaining our leadership share in technical packs. Overall, I would say our performance is on an upward trajectory.

Brian Grass, CFO

And I'd just add, Peter, that in terms of assumptions for the remainder of the year, we do attempt to update our category view every quarter, and we did do that, but I would say it was very similar to the view that we had last quarter. So, no, I'd say no major change being driven from category assumptions.

Peter Grom, Analyst

Okay. That's super helpful. And then just on the buyback, and I apologize if I missed this, but just any thoughts on how you're thinking about timing? Is this something you're looking to complete in a relatively short timeframe here, or is this more of a longer-term program?

Brian Grass, CFO

No, there are no real views on it. This was simply a housekeeping matter for the Board to renew our authorization, as it was set to expire at the end of August. It was primarily a refresh of our authorization, bringing it back to the historical levels we've established, and we will look to execute those as opportunities arise in the future. So, there are no urgent views on this, just good housekeeping.

Peter Grom, Analyst

Got it. Thanks so much. I'll pass it on.

Sabrina McKee, Senior Vice President of Business Development and Investor Relations

Thanks, Peter.

Operator, Operator

Thank you. Our next question comes from the line of Rupesh Parikh with Oppenheimer & Company. Please proceed with your question.

Rupesh Parikh, Analyst

Good morning and thank you for taking my question. I wanted to revisit the implied outlook for the second half of the year. Given the second quarter results, it seems like the latter half may be slightly weaker in terms of sales and earnings per share. I'm curious about the factors driving that or if it might simply reflect a more conservative approach.

Noel Geoffroy, CEO

Yes, Rupesh. Good to hear from you. So, look, when we looked at quarter two, we saw less of a revenue impact from the Tennessee Distribution Center than we anticipated as Brian called out in his remarks. And so that helped us in the quarter and then we didn't feel it was enough to flow through from there. That's really the difference. Brian, anything you want to add?

Brian Grass, CFO

Yes, I would say we exceeded the high-end of our expectations by about $4 million, and we had anticipated around $5 million of disruption from the distribution center. Overall, it felt like we met expectations in that regard and it wasn't sufficient for us to consider raising our guidance for the second half.

Rupesh Parikh, Analyst

Great. For my follow-up question, as we examine the Beauty category, it has certainly become more competitive, and there are some macro challenges affecting consumers. What do you identify as the main strategies to return that category to growth? Additionally, how do you perceive the timing for these improvements? Is it likely to take a few quarters to see progress, or can you provide any further details regarding your efforts and the expected timeline for a turnaround in the Beauty category?

Noel Geoffroy, CEO

In the Beauty category, we've focused on building a solid brand foundation by conducting detailed quantitative segmentation of consumers, allowing us to understand our target segments better and how to align our brand portfolio with them. We completed this groundwork at the beginning of the year, and now the brands are leveraging these insights to progress their plans. We have also introduced new leadership in Beauty & Wellness to bring fresh perspectives and have held numerous discussions with key retailers to gather their insights. You can already see the positive results in the market, particularly with Curlsmith, which is performing well and gaining market share in a rapidly growing segment with many new products receiving positive consumer feedback. In terms of Drybar, some of the liquid product extensions, like Big Brew, are performing exceptionally well by addressing the consumer need for solutions for thinning hair. The Revlon Volumizer has been repositioned to appeal to value-seeking consumers, offering strong quality performance at a price point that's accessible. Revlon continues to lead in hot air stylers, with our One-Step product significantly outpacing competitors. We will continue to focus on effective marketing, new product innovations, and strategic positioning with our retail partners. We have more innovations on the horizon that we believe will generate excitement as we approach the end of the year.

Rupesh Parikh, Analyst

Great. Thank you for all the color and best of luck.

Noel Geoffroy, CEO

Thanks, Rupesh.

Operator, Operator

Thank you. Our next question comes from the line of Bob Labick with CJS Securities. Please proceed with your question.

Robert Labick, Analyst

Good morning. Thanks for taking our questions. I wanted to kind of follow up on what you were just saying there. You've increased brand investment, but you've also increased investment in data and analytics capabilities. Can you like tell us what are the key learnings from this increased data and analytics so far? And what have you done and what have you changed in your processes or your outlook, investment, et cetera, as a result of the learnings from the data and analytics capabilities you now have?

Noel Geoffroy, CEO

Yes. Thanks, Bob. That's been a really big focus for me. I really felt that we will be better by using data and analytics to inform everything we do, and so it started with the foundational consumer segmentation and understanding in the brand-building framework so that we're really clear going into our planning who were looking to reach and who is sort of that high-growth prospect consumer segment by brand. And then as we're allocating the incremental media that Project Pegasus helped generate, it's using that insight to go after the right target audience, and then we did a very robust first-time-ever marketing mix model that allows us to understand our return on ad spend across all the brands in our portfolio, but also importantly, every single tactic that we use. So we're able to optimize our spend across the brand portfolio, but also importantly across the tactics. So we can look across upper and lower funnel and really optimize against that return on investment and the reach that we're looking to get. So it's really a completely new way of going to market for Helen of Troy, who we're talking to and then how we're measuring the impact of that spend.

Robert Labick, Analyst

Okay. Great. And then, Brian, I think you touched on the shorter holiday season, I guess, with later Thanksgiving and stuff. Could you give us a sense of how the retail environment is setting up right now versus, I guess, expectations and versus prior years?

Brian Grass, CFO

Yes. I mean, there is an expectation of a softer environment, which I would say we kind of had for the remainder of the year before we really got to the holiday season. So I would say the expectations are more value-oriented and maybe a little bit softer, but I feel like we had that embedded in our expectations already.

Robert Labick, Analyst

Okay. Great. Thank you.

Noel Geoffroy, CEO

Thanks, Bob.

Operator, Operator

Thank you. Our next question comes from the line of Olivia Tong with Raymond James. Please proceed with your question.

Olivia Tong, Analyst

Great. Thanks. Good morning. You had mentioned that several categories have been normalizing now, for example, OXO. So can you talk about how do you expect that to manifest? Are you advertising more behind them? Is there more shelf space either in brick-and-mortar or more focus online on those categories? And how do we think about that in light of the more challenging macros, particularly as it relates to promotional levels in your key categories and whether retailers are going to be tighter on inventory near term?

Noel Geoffroy, CEO

Thank you, Olivia. I would say that the categories we're normalizing have been significantly affected by COVID. For example, kitchen utensils continue to decline as we transition from the COVID surge in that product line. However, they are starting to stabilize now. Looking ahead, categories like kitchen utensils and many OXO products are influenced by factors such as new home formations and seasonal meal preparations. Current consumer behavior regarding dining choices also affects OXO's performance. As consumers become more mindful of their spending and choose to eat at home more often, it positively impacts our brand. Other categories, like thermometers and air purifiers, are also seeing normalization post-COVID, though some areas still haven't fully stabilized, like dry food storage. Regarding retail inventory, we don't notice any significant issues at the moment. However, retailers performing below expectations are managing their inventory differently, making it harder for us to gain visibility compared to the past. They are tending to manage inventory at a total store level rather than by category, which can sometimes lead to unexpected impacts, but overall, I don't see a major inventory problem in the retail marketplace currently.

Olivia Tong, Analyst

Got it. That's helpful. And then just thinking about the guide and maybe you can help us understand sort of the building blocks to get from one end of the range to the other now that you are at the halfway point of the year. Likely, you have some fairly reasonable visibility into holidays, recognizing, of course, a shortened holiday period this year versus last year, but just any sort of building blocks around one end to the other? Thanks.

Brian Grass, CFO

So you're talking about what would change between the high end and the low end of our guidance, Olivia?

Olivia Tong, Analyst

Basically just trying to understand what the parameters are to get to the high end of the outlook versus the lower end of your outlook given that...

Brian Grass, CFO

That helps. I would say the building blocks for the high end of our guidance are clear to us, and as we've mentioned before, we've closely examined point-of-sale trends, assuming that the current trends would remain steady for the rest of the year. The main factor that could shift us toward the lower end of the range would be a decline in point-of-sale trends. If those trends were to decrease from their current levels, it would influence us to move closer to the lower end of our forecast, but that’s pretty much it. We haven’t taken any chances with opportunities that lack visibility for the high end of our outlook. In terms of point-of-sale, we've assumed that slightly lower trends could pull us down, but that’s all. We haven’t made any optimistic assumptions regarding additional factors like distribution gains, new product innovations, or our marketing investment returns. We have solid data to support our stance on these building blocks. Therefore, any significant change in trends or the broader macro environment would be needed for a shift. Noel, do you want to add anything?

Noel Geoffroy, CEO

No, I think that's right. And as we've said before, the biggest tangible building block in the back half is distribution, followed by, I would say, some incremental innovation, and then the marketing spend.

Olivia Tong, Analyst

Got it. Thank you so much.

Operator, Operator

Thank you. Our next question comes from the line of Linda Bolton Weiser with D.A. Davidson. Please proceed with your question.

Linda Bolton Weiser, Analyst

Yes, thank you. Initially, the expectation was that we would see significant distribution growth in the latter half of 2024, which would extend into the first half of the following year. Can you provide any quantifiable insights on the distribution advantage for the first half of your fiscal year, despite the complications from the DC implementation? Also, will the distribution benefit in the second half be larger or smaller than what you've already experienced? Thank you.

Brian Grass, CFO

Yes. Just to answer the second question first, the distribution gains we are getting in the second half of this year should be bigger than the carry-forward gains from the prior year that impacted the first half of this year. So we have secured incrementally more distribution, I would say, that we'll apply to fiscal year '25 than we had secured in fiscal year '24. And we haven't really sized it. So I would not be comfortable giving that right now. We haven't really sized it publicly. And so we have talked about the dimensionality of the new distribution that we have for fiscal year '25. But with respect to '24 and its carryover impact on fiscal '25, we haven't really disclosed that. But I will tell you that the fiscal '25 gains are bigger than fiscal '24.

Linda Bolton Weiser, Analyst

Thank you for your insights. I wanted to ask about the Ulta locations within Target. Our observations indicate that the selection of brands is somewhat limited compared to a typical Ulta store, but we noticed that both Drybar and Curlsmith have significant shelf space there. Could you elaborate on this? Do you believe this arrangement contributes positively to the overall growth rate, or is it more about placement? Thank you.

Noel Geoffroy, CEO

Thank you, Linda. I believe that having our brands widely accessible to shoppers is beneficial, and the Ulta presence in Target contributes to that. It enables us to showcase some of our premium products like Curlsmith and Drybar. Despite the limited selection, I see this as a positive development. With a high volume of shoppers at Target, having a store within a store enhances our visibility. While I can't specifically quantify its impact, everything is counted under Ulta for us. Personally, I view this as a great opportunity for our brands, allowing products like Curlsmith to reach shoppers at Target effectively. Overall, I see this as a positive move, much like the Sephora setup in Kohl's, which follows a similar concept.

Operator, Operator

Thank you. Our final question comes from the line of Susan Anderson with Canaccord Genuity. Please proceed with your question.

Susan Anderson, Analyst

Hi. Thank you for taking my question. I was wondering if you could share your thoughts on consumer spending as we approach the holiday season. Do you expect it to be consistent with the spending on discretionary items we've seen throughout the year? Also, could you discuss the promotional activities you're anticipating compared to last year and how you're preparing for the season? Thank you.

Noel Geoffroy, CEO

Thanks, Susan. In general, regarding holidays, we have one last week, and I think prime days are happening right now, which will provide some insight. It's a bit of a lead-up to the holidays to gauge consumer preferences. Based on what we hear, consumers are facing challenges with their finances. They are spending but being selective about where and how they allocate their money, and I expect this similar behavior during the holiday season. They will be searching for gifts that genuinely satisfy a specific need or those that will truly delight the recipients. This overall consumer sentiment is likely to carry into the holidays. Also, consumers are searching for value in promotions. Notably, retailers like Walmart and Costco are performing well, as consumers associate them with good value. We're prepared with promotional plans for all our brands throughout the year, focusing on key events. I don't foresee any significant changes in our discount strategies. For instance, during the current Prime Days, our assortment is broader than in the past, with Osprey joining for the first time, mainly because they are expanding into adjacent categories. We have relevant items for participation, and this event is significant for us. I expect us to continue exploring opportunities for our brands to engage in major events, but I don't anticipate substantial depth discounts considering the current consumer landscape.

Susan Anderson, Analyst

Okay, great. That was very helpful. Maybe if I could just add one more. If you could talk about the cadence of gross margin, I guess, between the third and fourth quarter in the back half. Are you expecting any differences there? Maybe you could just talk about the puts and takes also versus the first half? Thanks.

Brian Grass, CFO

Yes, I would say just if you compare Q2, our gross margin was below our expectations and there were a couple things going on there that we wouldn't necessarily expect to repeat, like year-over-year inventory obsolescence and then a little bit of margin compression that we did see in Q2 because we launched at Costco. We had lower DTC, which I think is going to normalize, and then we had a little bit higher closeouts. So those all weighed on the margin, but I expect that to normalize and get back more towards a prior year and maybe slightly above prior year in the second half. And sorry, what was the second question?

Susan Anderson, Analyst

That was it. Well, I guess just the difference between the first half and then the third and fourth quarter as well.

Brian Grass, CFO

Okay. Yes, I'd say third and fourth quarter are very similar, and both pretty consistent with prior year, maybe slightly above.

Susan Anderson, Analyst

Okay, great. Thanks so much. Good luck for the rest of the year.

Brian Grass, CFO

Thank you.

Noel Geoffroy, CEO

Thanks, Susan.

Operator, Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to management for any final comments.

Noel Geoffroy, CEO

Thank you all for joining us today as we share the significant progress we are making to reset and revitalize our business this fiscal year. We believe we're taking the right steps on the path to sustainable long-term top line growth, and we really look forward to updating you all on our progress on future calls. Thanks so much.

Operator, Operator

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.