Earnings Call Transcript - HELE Q2 2023

Operator, Operator

Greetings, and welcome to the Helen of Troy Limited Second Quarter Fiscal 2023 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, Jack Jancin, Senior Vice President, Corporate Business Development for Helen of Troy. Please go ahead, sir.

Jack Jancin, Senior Vice President, Corporate Business Development

Thank you, operator. Good morning, everyone, and welcome to Helen of Troy's second quarter fiscal 2023 earnings conference call. On the call today with me are Julien Mininberg, our CEO; Mr. Matt Osberg our CFO; and our COO, Noel Geoffroy. 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 will comment on the financial performance for the quarter and current trends. Then, Mr. Matt Osberg, the Company's CFO, will review the financials in more detail and provide an update on our financial outlook for fiscal 2023. 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 financial 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. I will now turn the conference call over to Mr. Mininberg.

Julien Mininberg, CEO

Thank you, Jack. Good morning, everyone, and thank you for joining us today. Today, I would like to talk about our second quarter results, the changes we see in trends since our July call, the various factors leading to our revised outlook for this fiscal year, and provide an update on our progress on the initiatives we announced in July. As a reminder, those initiatives were to normalize our elevated inventory levels, launch a new corporate program to further improve our productivity and lower our costs and move faster on several strategic changes and deficiency projects that we've identified in our Health & Wellness segment. Let me start with that update. Over the summer, we built these initiatives into an overall restructuring project we are calling Pegasus. The basic idea of Pegasus is to significantly accelerate and amplify our transformation to provide a stronger platform for operating margin expansion, reduce inventory, raise return on invested capital, and improve cash flow. Pegasus is a multi-year initiative with a three-year arc designed not only to improve profitability but also help us more efficiently leverage our investment flywheel. As Pegasus generates savings, we plan to invest a portion of those savings back into the business under our new and leaner cost structure. The timing and extent of the reinvestment will depend on the future macro conditions and on the opportunities that provide the most attractive return on investment. We believe this will also help generate more profitable growth once consumers' patterns of consumption normalize and once retailer replenishment better aligns with sell-through. We came into the current environment with considerable momentum, an outstanding portfolio of leadership brands, outstanding people, and a powerful positive culture. Like many other companies, we are addressing the difficult short-term macro deterioration and in our case, we are simultaneously and purposefully focusing on Pegasus to significantly improve what is within our control. The Pegasus Theory team is being led by our COO, Noel Geoffroy, with the support of a premium global consulting firm as well as a dedicated internal core team. Strategically, Pegasus is intended to return Helen of Troy to the top quartile of our peer group on measures such as revenue and earnings per share growth, cash flow generation, and total shareholder return. E-initiatives in Pegasus include optimizing our brand portfolio, accelerating and amplifying cost of goods savings projects, enhancing the efficiency of our supply chain network, optimizing our indirect spending, streamlining and simplifying the organization, and reducing our inventory. Pegasus will also include initiatives to improve margins, growth rates, and brand portfolio in Health & Wellness. I am very confident that the major projects that make up Pegasus are the right ones. Starting with our brand portfolio, we have demonstrated our willingness to exit underperforming businesses such as mass-market personal care when they are no longer right for our long-term portfolio, profitability, and growth targets. Pegasus includes a further look at our businesses through this lens. On the acquisition side, we have demonstrated our ability to deploy or redeploy capital on acquisitions that add fast-growing brands in on-trend categories. Recent examples include the ones made so far in Phase II, Osprey, Curlsmith, and Drybar that are delivering on our strategy to further diversify our portfolio in outdoor and prestige beauty. The cost of goods savings projects in Pegasus are intended to amplify and accelerate work already underway and identify new opportunities to better leverage our scale and procurement, supplier consolidation, and platforming technologies more rapidly and at lower cost. Pegasus projects in other parts of our supply chain are intended to move faster on streamlining our distribution network and footprint. This will lower costs, free up capital, and accelerate our ability to capture the efficiencies of the state-of-the-art automation and IT systems in our new distribution center. Selling down our elevated inventory of certain existing products will also contribute to capturing these efficiencies. The net effect of these supply chain and inventory changes will make a big difference to how quickly we can improve working capital and increase cash flow. The Pegasus initiatives on optimizing indirect spend will help us standardize and simplify in additional spend areas such as marketing, similar to what we have already done in IT and in other areas. The next round of optimization will also allow us to reapply best practices more quickly, better leverage purchasing power across business units, and further increase our focus on return on investment. By streamlining our organization, we believe we will be able to create further operating efficiencies through selective centralization that more easily allows us to leverage our scale, prioritize investment decisions across our business, and shift resources to the brands and projects we expect will have the greatest positive impact for our consumers and for our retail customers. Turning now to look at the quarter. Despite the current challenges, we are pleased to report revenue growth and adjusted earnings per share in line with the quarterly outlook we provided in July. Stepping back to look at the first half of the fiscal year, we believe it is important to note that even with the various ups and downs from the pandemic over the past two and a half years and the EPA matter, sales of our portfolio of organic and acquired leadership brands grew 40% in the first half of this fiscal year compared to the fiscal 2020 pre-pandemic year. As discussed in our April and July earnings calls, we saw a notable change in consumer buying patterns beginning in March and April. This trend continued throughout the second quarter, accelerating in some categories, resulting in a larger overall slowdown in demand than we expected in our organic business. Consumers further tightened their purchasing patterns in some categories in response to higher than expected inflation on basics such as rent, gasoline, and food, and the impact of higher than expected interest rates rippling through the global economy. As a result of these changes in consumer purchase habits, most retailers slowed their repurchase orders and further adjusted their inventories and weeks on hand to match reduced sell-through. Within our diversified portfolio, we can see consumers generally trading down or delaying purchases in some discretionary categories such as beauty appliances and home-related categories. With our portfolio intentionally built to focus on the better and best segment, changing consumer purchase habits that had an outsized negative impact on our revenues and market share in those categories. In some cases, our brands are a beneficiary of trade down, such as in thermometers where sales of Vicks Thermometers were strong in the second quarter, and we grew market share significantly as consumers sought quality products from trusted brands whose lineups include lower-priced alternatives. Other discretionary categories such as outdoors and prestige beauty liquids are more on trend and performing much better. As examples, demand for Osprey's everyday travel packs was strong, as was demand for Drybar and Curlsmith liquids. As always, healthcare essentials such as thermometers and humidifiers trend with healthcare needs, and our health brands have the outstanding products, range of price points, and the trusted names consumers rely on to care for their families. Looking at our business segments. Sales growth in the quarter was led by Health & Wellness, which increased 27.6%. We achieved significant sales growth in water purifiers, air purifiers, and humidifiers due to the EPA-related stock shipment actions in the prior year. We benefited from an uptick in category growth during the summer and back-to-school periods, and we have largely restored PUR's shelf placement in brick-and-mortar and online. In humidification, Vicks grew share in both devices and consumables as we were able to put more product on shelves and meet incremental demand as consumers experienced the summer surge of Omicron and its variants. While we continue to see the U.S. thermometer category decline off the historic high base set in the peak of the pandemic, our Vicks digital thermometers achieved strong revenue and share growth over the last 13-week period, as mentioned. With our Braun and Vicks thermometers, both serving different consumer segments and both delivering healthy operating margins, the diversification of our product lineup between the two brands is a winning mix. Turning to Home & Outdoor, total sales increased 11.8%, which included the acquisition of Osprey. Sell-through for Hydro Flask grew modestly in the quarter with strength in collegiate during the back-to-school period and strength in grocery, while the brand lost market share overall in the United States. Online sales were strong, and we grew share at our largest online retailer. Internationally, Hydro Flask increased sales in Asia and Canada fueled by improved consumer demand. Looking ahead, we are focused on improving our DTC presence as we launch our new DTC platform this fiscal year. Osprey had a strong quarter contributing $47.4 million in sales and remains on track to achieve our outlook range of $180 million to $185 million for the full fiscal year. As expected, OXO continued to face sell-through declines similar to what we saw in the first quarter. The overall categories it competes in are generally declining from COVID level peaks as consumers shifted some of their spending away from home-related goods and adjusted their budgets to address inflation. Nonetheless, total sell-through for OXO remains solidly ahead of pre-pandemic levels. While we rarely mention specific retail situations given the developments at Bed Bath & Beyond during the quarter, we want to update you. Over the past few years, we have decreased our concentration of business with Bed Bath & Beyond and are continuing to manage our credit exposure. That said, we are highly encouraged by their public statement emphasizing their refocus on leading power brands like OXO that have been so important to driving traffic and sales. We are highly supportive of their strategic return to what we believe contributed to the previous success of this iconic retailer. Regarding OXO, we are working closely with them at the highest levels. Turning to Beauty. Core segment sales declined by 11% in the second quarter, primarily driven by continued softening in the hair appliance category off the high base of fiscal 2022. The overall hair appliance category has experienced a decline. We have lost some share in U.S. mass merchandisers as consumers traded down in that channel, partially offset by growth in our largest online retail partner. On the prestige liquid side of beauty, Drybar continued to perform well, growing over the period in the prior year as we improved our supply to meet demand. Curlsmith performed in line with our expectations for the quarter and remained on track to deliver its full-year forecast. For beauty, stepping back to look at Phase II to-date, our focus on consumer-centric innovation, accretive acquisition in the prestige segment, and building a much more capable organization that leverages our global shared service platform has resulted in improved sales, profitability, and market share during the transformation. While the current environment is highly challenging, we are working on new distribution and new products that we expect to serve as building blocks for the future. Looking at our international business, total net sales increased 27.4% over the second quarter of last year with particular strengths in EMEA, Canada, and Asia. Growth primarily reflects the incremental sales from the acquisitions of Osprey and Curlsmith. The macroeconomic challenges outside of the United States are comparable to what we all see domestically, exacerbated by the further impacts of the strong dollar and war-related energy and security in Europe. This served to exacerbate and escalate inflation and recession fears, causing shifts in consumer shopping preferences and higher price elasticities. We are responding by focusing our efforts on those opportunities that provide the biggest potential. We expect consolidated international sales growth in the second half of the fiscal year, primarily driven by Osprey. We would like to turn now to our revised full fiscal year 2023 outlook. The deterioration of macro trends, the trading down behavior impacting our portfolio, and share losses in some of our categories lead us to lower our organic revenue expectation and EPS outlook for the balance of the year. Our revised outlook includes our expectations for pressure on consumer spending and further retailer inventory corrections. With regard to the upcoming cough, cold, and flu season, our guidance assumes a return to historical pre-pandemic incidence levels, as adults spend more time traveling and in offices, as students return to in-person schooling, and as COVID restrictions are largely dropped in most parts of the world. Lastly, our outlook includes the impact of certain supply chain interruptions, particularly in select thermometer models where securing sufficient chip supply has been a challenge. We are being thoughtful about how we balance our short-term profitability goals with our objective to preserve market share, putting ourselves in a better position to return to growth, especially once retailers' replenishment patterns normalize to reflect the point-of-sale sell-through. Our brands have a long history of earning trust and winning with consumers. We remain focused on value reframing and on product innovation to ensure consumers continue to recognize the quality, features, and benefits our brands provide. Stepping back, I remain highly energized and enthusiastic about our business and the choices we are making to position our company for continued long-term leadership and profitable growth. We see Pegasus as a major catalyst to returning to top quartile financial performance. By streamlining our portfolio, costs, processes, and organization, we believe we can create significant value and are focused on doing so. We also expect to produce continued attractive returns from our strategic focus on consumer-centric product and commercial innovation, our disciplined investments in our leadership brands, international expansion, and new growth opportunities such as direct-to-consumer. With that, I would like to hand the call over to our CFO, Matt Osberg.

Matt Osberg, CFO

Thank you, Julien. Good morning, everyone. I would like to start with an overview of our second quarter results, then discuss our updated fiscal '23 outlook before concluding with more information on Project Pegasus. In our second quarter, despite the challenging economic environment, we delivered results largely in line with our expectations. Our consolidated net sales increased by 9.7%, mainly due to contributions from the Osprey and Curlsmith acquisitions, along with significant organic growth in the Health & Wellness segment, which was affected by the previous year's EPA issues. Overall, organic sales negatively impacted consolidated sales by 1.5 percentage points, particularly due to declines in the Beauty and Home & Outdoor segments, driven by lower consumer demand, changes in spending habits, retailer inventory adjustments, and $5.7 million in personal care sales from last year that we divested. The GAAP consolidated operating margin for the quarter was 9% of net sales. On an adjusted basis, operating margins fell 3.2 percentage points to 13.9%, as operating leverage from higher sales and reduced annual incentive compensation was counterbalanced by increased outbound freight costs, higher marketing expenses, a less favorable segment mix, and rising salary and wage costs. The higher marketing expenses chiefly stemmed from the Osprey and Curlsmith acquisitions and increased spending in Health & Wellness following significant cuts last year due to the EPA issue. Adjusted operating margins decreased across all segments, with the largest decrease in beauty due to unfavorable operating leverage and increased costs. In Home & Outdoor, the Osprey acquisition negatively impacted adjusted operating margins as expected. We anticipate Osprey's operational margins will improve over time, surpassing the company fleet average by fiscal '25. Adjusted operating margin for Health & Wellness declined as favorable leverage and lower personnel expense were mainly countered by unfavorable comparisons to last year's tariff exclusion refunds, higher costs, and increased marketing expenses. We expect Project Pegasus initiatives to enhance the short- and long-term profitability of the Health & Wellness segment. Net income was $30.7 million, or $1.28 per diluted share. Non-GAAP adjusted diluted EPS fell 14.3% to $2.27, mainly due to lower adjusted operating income in the Beauty segment and higher interest expense. Inventory reached $643 million at the end of the quarter. We expect total inventory to decline sequentially in the third and fourth quarters of this fiscal year, finishing fiscal '23 flat compared to fiscal '22. While this year's cash flow will depend somewhat on our ability to reduce inventory, we continue to anticipate slightly negative free cash flow for the full fiscal year. We ended the quarter with total debt of $1.17 billion, up $64 million from the first quarter of fiscal '23, mainly due to capital expenditures for our new distribution center and cash used for inventory. Our net leverage ratio was 3.16 times at the end of the second quarter. We expect our leverage ratio to decline sequentially in the third and fourth quarters of this fiscal year to end fiscal '23 in the 2.75 to 3.0 times range. Now I will discuss our revised fiscal year outlook. The external operating environment has become more challenging, leading us to lower our full-year outlook for sales and adjusted diluted EPS. The revised sales outlook reflects expected category declines and share loss in the beauty appliance and insulated water bottle categories, influenced by inflation-related changes in consumer spending and retailers adjusting their inventory to align with lower sales forecasts. Our sales outlook has also been negatively impacted by ongoing supply chain disruptions for specific Health & Wellness thermometers and unfavorable foreign exchange rates. Approximately 12% of our net sales during the six-month period ended August 31, 2022, were denominated in foreign currencies. During this period, our sales faced a $7.7 million or 0.8% negative impact from currency fluctuations. We have updated our outlook for the remainder of the fiscal year under the assumption that exchange rates from September 2022 will remain constant. Additionally, we continue to utilize cash flow hedges to manage a portion of our foreign currency exposure. Our adjusted diluted EPS outlook is primarily affected by anticipated lower sales volume, somewhat offset by lower annual incentive compensation and other cost reduction measures. For fiscal '23, we now project consolidated net sales revenue between $2.0 billion and $2.05 billion, reflecting a consolidated decline of 10% to 7.8% and a core decline of 8.6% to 6.4%. We are pleased that our prior sales expectations for Osprey and Curlsmith remain intact. By segment, we expect Home & Outdoor growth of 3.5% to 5.5%, which includes net sales from Osprey of $180 million to $185 million; Health & Wellness to decline by 13% to 11%; and the beauty core business to decline by 21% to 19%, which includes Curlsmith's net sales of $30 million to $35 million for ten months of ownership in fiscal '23. We now anticipate consolidated GAAP diluted EPS between $4.26 and $4.93 and consolidated non-GAAP adjusted EPS ranging from $9 to $9.40, reflecting a consolidated decline of 27.2% to 23.9% and a core decline of 26.1% to 22.8%. This includes an adjusted diluted EPS contribution from Osprey of around $0.35 to $0.40 and a pro-rata contribution from Curlsmith of about $0.15 to $0.20 for fiscal '23. The expected decline in Osprey's EPS contribution compared to our previous outlook primarily results from higher interest expenses, due to our updated assumption of 450 basis points in interest rate increases for calendar year '22. While we expect slight gross margin expansion in fiscal '23, we estimate our consolidated adjusted operating margin will fall by approximately 100 basis points, with a similar year-over-year decline across all segments. This consolidated decline is expected to be influenced by decreased operating leverage, inflationary price effects, the dilutive influence of the Osprey acquisition in Home & Outdoor, and higher distribution and salary costs, along with unfavorable product mix effects in Health & Wellness. Our outlook for after-tax impacts from incremental inflationary costs has slightly decreased to about $55 million to $60 million or approximately $2.25 to $2.50 of adjusted diluted EPS. We believe we can mitigate many of these costs through our established playbook, which includes using our contracted shipping rates and implementing productivity and cost savings initiatives with suppliers, along with existing price increases. For instance, despite declines in market variables like container spot rates compared to earlier peaks this year, we continue to procure sea freight below current spot rates due to favorable long-term contracts. Our interest expense outlook remains at $45 million to $47 million. While we now expect the Fed to raise interest rates by 450 basis points in calendar year '22, this is offset by the favorable implications of capitalizing interest costs related to our new distribution center's construction. Given the dynamic market conditions and the unique factors influencing year-over-year comparisons, we are providing additional quarterly details regarding our expectations for net sales revenue and adjusted diluted EPS. About the quarterly cadence of consolidated net sales, we anticipate a mid-teen percent sales decline in the third quarter and a high-teen percent decline in the fourth quarter. Last year's fourth quarter included sales from specific retailers securing extra supplies ahead of anticipated price increases, the positive effects of health-related products from the initial Omicron wave, and around two months of sales from the Osprey acquisition. For the quarterly cadence of the adjusted diluted EPS outlook, we expect a high 20s percent decline in the third quarter and a low 20s percent decline in the fourth quarter, largely due to lower sales volume, increased interest expenses, and a higher adjusted effective tax rate. As Julien mentioned, we focused this quarter on advancing Project Pegasus, our global restructuring initiative aimed at expanding operating margins through efficiency improvements and cost reductions. Pegasus is designed to further optimize our brand portfolio, streamline the organization, accelerate cost savings projects, enhance supply chain efficiency, optimize indirect spending, and improve cash flow and working capital. We project annual pre-tax operating profit improvements of about $75 million to $85 million, starting in fiscal '24 and expected to be largely realized by the end of fiscal '26, with savings distributed approximately 25% in fiscal '24, 50% in fiscal '25, and 25% in fiscal '26. We expect total profit improvements to come from approximately 60% lower goods sold costs and 40% from reduced SG&A expenses, with total one-time pre-tax restructuring charges estimated at $85 million to $95 million over the plan's duration, largely from severance and employee-related costs, professional fees, contract terminations, and other exit costs. All operating segments and shared services will be affected by this plan. We believe these initiatives will create operating efficiencies, enhance margins, and provide a basis for future growth investments. In addition, as part of Project Pegasus, we have initiated plans to reduce inventory levels, improve inventory turnover, and enhance cash flow and working capital. Moving forward, we are diligently working to return to growth in fiscal '24. Though it's challenging to foresee the macroeconomic conditions and consumer behavior we'll face, I believe the initiatives outlined in Project Pegasus will help alleviate some anticipated cost pressures we expect in fiscal '24 as we adjust to higher interest rates, added depreciation from our new distribution center, and increased annual incentive compensation. As we enter fiscal '25 and '26, savings from Pegasus will open up further investment opportunities as we strive to create long-term shareholder value. In closing, I am proud of how our teams are adapting to a rapidly changing environment by focusing on customer and consumer service, while actively seeking out opportunities to reduce costs and enhance efficiency. We will continue to navigate the immediate earnings pressures while investing in key transformation initiatives that propel our growth and deliver long-term shareholder value. Now, I will turn it back to the operator for questions.

Operator, Operator

Thank you. Our first question comes from Bob Labick with CJS Securities. Please go ahead with your question.

Bob Labick, Analyst

I wanted to start by asking if you could provide some insight on how much of the change since the April guidance has been driven by underlying demand compared to the inventory adjustments we've observed. Additionally, what is your best assessment of when retail order patterns might return to normal, and how will you determine that they've normalized?

Julien Mininberg, CEO

Yes, it's a great question. We work on this as well. It's very tough to separate these two. Both are material, and it's hard to tell just because it's a chicken-and-egg situation. The inventory corrections come based on the consumption, and if the consumption is less than the retailer expected, which has been the case in some of our categories, then they lower their inventory, their repurchase rate and adjust their inventory. So the chicken-and-egg part, I think the easiest way to think about it is that in the end, it's all consumption-driven because the retailers' current order estimates are based on their sell-through rates. So as we call the sell-through rates down a bit lower, there'll be a bit more trade inventory that has to get worked through. From our standpoint, it backs up into our inventory, and then we work through ours. So there's a backlog in that regard. In the case of the timing, it's hard to know just because there's a lot of pressure on the financial health of consumers these days. So the normalization, I think, is more about the normalization of buying patterns as opposed to normalization of buying volume. And it's my belief, but this is not a well-vetted fact, that the consumer has very basic needs in the categories where we provide outstanding products. So whether it's the basics of beauty. Beauty never goes out of style. Consumers always want to look good. I've never met a woman that doesn't. And the outcome is the needs are fundamentally there. So as consumers delay their purchases or even trade down, it doesn't mean they don't need it; it just means they don't need it now or don't want as high-priced an item now. So soon enough, I guess is the answer there. In the case of healthcare, it really floats with incidents. So this is more about the need based on how the sickness or perceived threat of sickness is and that makes people buy in healthcare. Again, we have the best products. It's well known from our market shares. You just saw the trade down helped us actually on Vicks Thermometers, which were up quite a lot in fact, last quarter on market share as an example. And in the case of the housewares versus the outdoors, the outdoors are on-trend, so we don't see a need to normalize there. It's just doing well. And then it's not like it's going to head down. It just didn't go up so much or down so much. It's just normal. And in the case of the housewares side, same thing; consumers have the fundamental need. A lot of that will depend on how the holiday season goes in retail, a little bit for housewares, a little bit for Hydro Flask, which does have a gifting tendency and to some extent for the beauty appliances that also have a gifting tendency. So that's where the normalization will come from, in terms of how quickly. I think it just depends on that consumer financial health and the sell-through rate retailers as they work through their inventory.

Operator, Operator

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

Rupesh Parikh, Analyst

So just going to the back half guide on the top line. I was curious if you could just walk through the key puts and takes there, how you're thinking about consumption, the inventory headwinds. And then I have one follow-up question after that.

Julien Mininberg, CEO

Yes. Hi, Rupesh. Similar to Bob's question, it's going to depend on those same factors, but we've done here. And I think the listeners in the market in general should simply know that we've called down our expectations for consumption in the back half, and frankly, we were surprised at the degree to which consumers slowed down in some of these particular categories. Just take beauty, for example. You hear a mixed message from the big retailers; they'll tell you beauty does well, but as you parse it out and ask which part of beauty does well, you'll find out that the liquids do well. But the appliances generally do well only in the lower price points. So for us, with a good, better, best portfolio, the better and best get hurt, the good needs to compete in those lower price points. So we're making those types of assumptions for the back half, meaning that the liquids will continue to do well, which they are already. I called that out in my specific remarks just now. And in the case of the appliances, we're assuming that they'll stay on this downward cycle for the rest of this fiscal year. And on the trade downside, we're taking action on bringing in products that are more suited to those price points on the one hand, on the other hand bringing some pretty cool new items as well, and stimulating the demand just like we have in the past with consumer-centric innovation on brands that we know people want. In the case of their retailer side, it's very similar to the answer from Bob. On the financial health of the consumer, it's very hard to say; it really depends on what the Fed does with the impact on consumers of interest rates and all the other macro stuff that people know. In our case, from a market share standpoint, you heard us speak a bit about that in my prepared remarks today. There's a lot of work going on to keep going on the subject of value reframing and to make sure our products are front and center with consumers with the benefits and price points that we know they want today. Noel, before we go to the next question, do you have any builds on the back half consumption of expectations? Okay. Well, then we're good, operator.

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

Wanted to think a little bit bigger picture about the outlook revisions and your view on consumer sentiment and where retailers stand. So, my question first is just how, if at all, this has made you think about your portfolio, maybe taking a harder look at some of the categories you're in, the price tiers that you're in, whether there's white space that you should be in or areas where perhaps you should think about strategic alternatives for your business?

Julien Mininberg, CEO

Yes. It's a great question, Olivia. We do this all the time, and you've seen us from time to time make adjustments in our portfolio either bringing things in or even pulling things out, and we're not afraid to do either one. Just in Phase II alone, we've made a significant disposition when we took out the mass market personal care liquids, but we added in the obvious three here, Drybar, Curlsmith, Osprey. So we're not afraid to move on this topic. We are looking at our portfolio now through the same lens of what fits. What we're not doing though is trading down our portfolio in the short term. I can't say that from a consumer health standpoint that this too shall pass; for all I know, there's a new lower normal for consumers. But I do know that pendulum swing and our products are not only timeless from a branding and trust standpoint, but we work extremely hard to keep them front and center for consumers. We do want to increase the range of products that we have from the good, better, best portfolio because consumers are speaking on that topic. On the subject of what it means for the portfolio, we're taking a look. We're looking inside Health & Wellness. We made that specifically called out in our prepared remarks. That's part of the Pegasus Project. And then other parts of our portfolio, while we're not looking as hard on what might not be right for our portfolio, we are looking at what might be right to add or to supplement in areas that we already play. And in terms of the big picture, I just want to use the moment to get a thought out, which is it's not just that the brands are timeless. It's that the work is specific on new products, specific on new marketing messages. And then, we ourselves are specific on shifting resources within the products to favor the ones that have the best prospects. So from a growth standpoint, there are meaningful building blocks; I mean, just look at beauty. Beauty alone has the opportunity to bring some lower price innovations in now. It also has some significant new products that are headed to the marketplace, and that in the past, we've innovated and benefited from those in beauty specifically. If you look at Curlsmith and Osprey, they're both organic. So this idea of, hey, let's look at the portfolio, we did and we went further in prestige liquids and outdoor. And what we believe is that they'll continue to grow at the high single-digit rate. That alone, just based on the projections that we've made for them is another $20 million for next year. We also believe, but I can't promise this, that the retailers won't need to make the same inventory adjustments for next year because they've already made them this year. And that alone is another building block. So if you take good brands, new products, good messages, growth in the stuff that's growing, and then new marketing messages and new firepower in the stuff that's not, we like our prospects.

Operator, Operator

Thank you. Our next question comes from the line of Anthony Lebiedzinski with Sidoti & Company. Please proceed with your question.

Anthony Lebiedzinski, Analyst

So, I guess, in terms of the restructuring plan, can you just walk us through this, what's the initial kind of low-hanging fruit so to speak that you think you'll be kind of the easiest to achieve it and which areas will take more time to implement?

Julien Mininberg, CEO

I'm glad you're asking about this. Just to let everyone know, Noel is on the call but is experiencing a technical issue, so I will address some of these topics on her behalf, although she is focused on this matter. She will be a key participant in the upcoming follow-up calls. Regarding Pegasus, we're very excited about its prospects. While it hasn't been specifically mentioned in questions, it's an important focus for us at Helen of Troy. We are moving quickly and confidently in the areas we've identified. To address your question, we are primarily focusing on opportunities in cost of goods, distribution, efficiency improvements, reducing inventory, and structural streamlining. Quickly going through these areas, we see significant potential for improvement in cost of goods, building on the positive changes implemented during our long-term transformation. We've identified additional layers of opportunity that we are swiftly addressing, and some benefits will materialize relatively quickly as a result. When it comes to distribution centers, they are closely linked to our inventory levels. As we reduce our inventory, we will see accelerated benefits from our new distribution center and direct-to-consumer initiatives, enhancing our efficiency. This may also allow us to free up capital in terms of real estate that we no longer need, creating a more efficient flow in our warehouses that have also undergone system upgrades, providing double benefits. From a sourcing perspective, as we shift away from reliance on China to diversify into Mexico and Southeast Asia, we are improving our buying power and consolidating suppliers. These are significant projects currently in progress. Although Pegasus is a multi-year initiative with a three-year timeline, we anticipate that many of these improvements will arrive sooner. We are also looking into SKU rationalization to help with inventory management. As we streamline organizational processes, we are developing exciting ideas that will allow us to connect business units more effectively with shared services, enhancing speed and focusing more on innovation and brand building. This results in a more efficient operational structure. We believe this will lead to stronger brands, a leaner cost structure, and ultimately, improved operating margins at a faster pace. That is the vision for Pegasus. Matt, do you have any additional input on this?

Matt Osberg, CFO

Yes, Anthony, I think, when you asked, you were saying, what comes a little bit sooner, what comes later? I would say, as Julien talked about some of the things that are part of Project Pegasus, COGS savings will come later because those are things you got to identify, negotiate and then implement with your vendors and then sell-through and buy your inventory. So that's just a longer tail on realizing some of those COGS savings, whereas more of the SG&A savings in the organization and maybe purchasing efficiencies can be realized sooner. So in terms of Julien said, what are we working on? There's a lot. But in terms of what might be flowing through the P&L sooner rather than later, that's how you should think about it.

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

So I just had a question specifically on Hydro Flask. Your comments, you said in your commentary that the sell-through was up modestly in the quarter, but that didn't really say anything about sales. Maybe sales were down or something. So I'm just curious, like what is going on exactly. So is it an inventory reduction in the channels that we're seeing for all the other categories? And if sell-through is kind of still pretty healthy, like why would there be the inventory reduction? And like what channel, can you just give a little more flavor on what's going on with Hydro Flask?

Julien Mininberg, CEO

Yes, I understand. This is a great question, and it's important to clarify because there is significant interest in Hydro Flask, particularly concerning the concepts of sell-through versus sell-in, and how these relate to our sales growth and market share. The demand for Hydro Flask is still quite strong. However, our market share fluctuates. For instance, in our largest online retail channel, we've gained considerable share in the last quarter. For the fiscal year so far, our overall market share has dipped slightly, but not by much. It has shifted within a range of two or three points over the past couple of years. Thus, I would describe it as a situation of continuing ups and downs. In terms of sell-in, it is slower, negatively impacting our sales performance. You might wonder why sales are slower if products are selling out. The reason lies in retailer inventory levels. Retailers are adjusting their strategies based on anticipated future demand and the number of weeks’ worth of inventory they want to hold. In a normal scenario, retailers would replenish stock based on expected demand and actual sales. In the current environment, they are making two key considerations: forecasting future demand and determining how many weeks of inventory they wish to maintain by the end of their purchasing period. Retailers have unique strategies based on these variables and their expectations for the holiday season that dictate how much inventory they wish to have on hand. Looking at Hydro Flask's fundamentals, they are very strong. We have an upcoming spring collection that will be featured more prominently in Q4 and early Q1. There are also new products we are excited about, along with promising direct-to-consumer prospects for Hydro Flask. I realize that some may be skeptical about these DTC plans, but I want to emphasize that we are launching these initiatives this fiscal year, which we expect will significantly improve our position in comparison to our competitors. Retailers, however, are currently being more conservative about carrying inventory, which is affecting our sales. We have incorporated this factor into our forecasts even more than before, which is why there appears to be mixed messaging.

Operator, Operator

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

Bob Labick, Analyst

Thanks for the follow-up here. Matt alluded to the inventory and some sequential improvements in the back half of this year. But maybe just a follow up, a little more clarity, how much excess inventory do you estimate you're carrying? And what's the timing for normalization? Is that partially in the second half and then carry into fiscal '24? Or how much excess inventory and when do you kind of get back to a normalized level and then get all that cash out of inventory and onto the balance sheet?

Julien Mininberg, CEO

Sure. It's a great question. We look at it more about elevated inventory because I know you and others on the call remember it was highly strategic to have more inventory during a period of much more supply chain uncertainty and elevated demand. That helped enormously in fiscal '21 and fiscal '22 as coming into this fiscal year. The slowdown that we're talking about is highly pronounced and not as big as what we expected, so it's more of an elevated and carryover of inventory than an excess. In the case of how quickly it sells down, it really depends on all the sell-through commentary that we have. Then Matt, I don't know how far you'd like to go to try to dimensionalize that for Bob on the subject of conversion to cash. Before I tip it to you though, I do want to say that the efficiency of our distribution centers and the speed with which the Pegasus projects on that subject can realize their benefits is highly benefited by the sell-down in inventory. So Matt, maybe you have gone on this?

Matt Osberg, CFO

Bob, you picked up on it. I think we are expecting sequential declines in Q3 and Q4, and we said getting to a place by the end of this fiscal flat compared to where we were at the end of last fiscal. But as Julien pointed out, it is based on sell-through normalizing and seeing how we come out of the holiday period. As we look ahead, I still think that there's opportunity to realize more efficiency out of our inventory and further take that inventory down. I think that would happen throughout fiscal '24 for us as we look ahead. So, I think there will be a big step for us getting from where we are now to the end of this year and then another big step as we look into fiscal '24.

Operator, Operator

Thank you. Our next question comes from line of Steve Marotta with CL King and Associates. Please proceed with your question.

Steve Marotta, Analyst

In the prepared remarks, there was commentary around the potential of sales growth or at least the plan for in fiscal '24. And I know without giving specific guidance, can you talk a little bit about what might have to happen for that to occur for that to be planned for?

Julien Mininberg, CEO

Yes, this is a great question. As you called out, it's awfully hard 18 months out, meaning the midpoint of this fiscal year through the end point of next fiscal year to predict the sales growth. We have our normal budget cycle and all of that. So this is more of a spring thing than it is a fall one. But to try to dimensionalize for you, let me give you a couple here and some near-term in some longer-term; just start with the current holiday season, there are programs with our key retail partners in hair appliances also for Hydro Flask and to some degree for OXO. In addition, Hydro Flask, I just talked through some of the building blocks with Linda. As I mentioned before, that spring seasonal reset of new line products is really more of a Q4 and early Q1 story. There are some new products there as well that we're excited about, and we're also excited about the DTC prospects in Hydro Flask. I think, there are people on this call who say, 'oh my goodness', I've been hearing that forever. What I'd like to say about that is, it's launching this fiscal year, and that'll give us a long, long-awaited bump on that topic and help us to catch up with competition who we believe is ahead of us in that area. And on the retailers themselves, they're just not as aggressive on carrying the inventory, which makes the difference in our sales. We've put that now into our forecast even further than we did before. That's why you're getting the mixed message.

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

Hi. We've had some questions from investors about the general situation with the price increases. I guess investors are suspecting that some of the price increases that have been taken will have to be rolled back. Are you seeing that happen? And can you just kind of comment on the whole pricing situation?

Julien Mininberg, CEO

Yes. Consumers are less financially healthy than before in general, as pockets, right? Some groups of consumers are different from others. But the inflation is nobody's friend. So to the extent that our price increases add to it, then in that way, the prices are not the friends of purchases. That said, costs are up, so are salaries, real incomes benefit from the wage increases but also get eaten away by the inflation. So the consumer's actually a bit worse off in general; I think 8% inflation, but maybe not 8% salary increase for everyone. And so from the standpoint of pricing pressure, it's there. In terms of our prices, in general, our prices have stuck, and it's our intention to try to continue that. And that said, we will adjust as needed to protect our market share. The marketplace is strong on that subject. It moderates as a buy and demand and price to get to the new normal. So, we'll do what we have to do. Then, in certain pockets, we're testing what would happen, if we did a bit less on price, and in other areas, we're sticking fast to find out where that new normal is. Yes, thank you, operator. Thank you, everybody for being on the call today. I hope people walk away with the key messages around where we are on our outlook for fiscal '23, which is to take a good hard look at the trends that we've seen, own frankly and embrace the facts of where we are in terms of market share, inventory, and some of the other things that I mentioned that are unique to Helen of Troy in our comments earlier today and in these answers. And then, I hope people see the power of what we're trying to do with Pegasus. Pegasus is revolutionary. We've not done a restructuring of this size in almost a decade, and what it's going to do for us, as outlined in the call, is generate significant savings that we'll use to refuel that flywheel and bring what I hope will be the best is yet to come. And that is very much our intention and act with speed. So with that, we look forward to talking to many of you in the coming hours, actually in the next couple of days. And then, I'm sure we'll meet with many of you as we now out of our quiet period and answer all of your questions. Hope you have a wonderful day. Thank you.

Operator, Operator

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