Earnings Call Transcript
HELEN OF TROY LTD (HELE)
Earnings Call Transcript - HELE Q1 2024
Operator, Operator
Greetings. Welcome to the Helen of Troy Limited First Quarter Fiscal 2024 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. At this time, I'll hand the conference over to Jack Jancin, Senior Vice President of Corporate Business Development. Mr. Jancin, you may now begin.
Jack Jancin, Senior Vice President of Corporate Business Development
Thank you, operator. Good morning, everyone, and welcome to Helen of Troy's first quarter fiscal 2024 earnings conference call. The agenda for the call this morning is as follows. I'll begin with a brief discussion of forward-looking statements. Mr. Julien Mininberg, the company's CEO, and Ms. Noel Geoffroy, the company's COO, will comment on financial performance of the quarter and current trends. Then, Mr. Brian Grass, the company's interim CFO, will review the financials in more detail and review our financial outlook for fiscal 2024. Following this, we will take questions you have for us today. This conference call may contain certain forward-looking statements that are based on management's current expectation 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 actual results. This conference call may also include information that may be considered non-GAAP financial information. These non-GAAP measures are not an alternative to GAAP financial information and may be calculated differently than the non-GAAP financial information disclosed by other parties. The company cautions listeners not to place undue reliance on forward-looking statements or non-GAAP information. Before I turn the call over to Mr. Mininberg, I would like to inform all interested parties that a copy of today's earnings release has been posted to the Investor Relations section of the company's website. 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, we would like to talk about our first quarter results, provide color across our business, and update you on our continued strong progress on Project Pegasus as well as some other company initiatives. We will also discuss our outlook for the full fiscal year. Starting with the quarter, I am pleased to report that our results, including our sales and adjusted earnings per share, were better than we expected despite continued pressure on our categories from lower consumer demand and shifting buying patterns. We're also pleased to improve our margins, make further progress on inventory reduction, and deliver significantly improved cash flow. Looking at revenue, we saw outperformance from key leadership brands, including OXO, Osprey, and PUR as well as from Curlsmith. Several of our leadership brands are improving share in certain categories in the United States, including technical backpacks from Osprey, kitchen utensils and storage containers from OXO, pharmacy humidifiers for Vicks, nasal aspirators for Braun, and seasonal heaters for Honeywell. Our prestige hair care liquids, which feature some of the highest margins in the company, grew during the quarter compared to the first quarter of last year. International also outperformed during the quarter driven by Braun. Our strategic choice to double down on international continues to pay off. For perspective, our consolidated first quarter revenue grew at a 6% compound annual growth rate compared to the pre-COVID base of fiscal '20. During the quarter, we also made good progress on margin, significantly improving gross profit margin and expanding our adjusted operating margin. We also delivered outstanding operating cash flow in the quarter, well ahead of expectations, driven by better-than-expected sales and significant progress on reducing working capital. I am very pleased with how well our organization is executing on the various initiatives we have announced designed to significantly improve cash flow in fiscal '24. In line with our stated objective, we used our cash flow to further reduce our debt, putting us in a better position to deploy additional capital sooner. Turning to our outlook. We are maintaining our expectations for net sales and adjusted earnings per share for the full fiscal year as well as our key cash flow and balance sheet targets. We expect to deliver, including a return to adjusted earnings per share growth in the back half despite expected pressure on our categories and consumers for the remainder of the fiscal year. That consumer pressure includes inflation, interest rates that are expected to stay higher, and increasing household debt, all of which are headwinds to discretionary purchases. On a positive note, we are seeing that retailer inventory rebalancing has largely normalized following the significant adjustments affecting nearly all consumer discretionary categories over the past year. Our retail partners are now increasingly matching their orders to consumer demand, where we have syndicated point of sale data, and in retailers where we have specific point of sale data, we are seeing demand normalize in some of our categories and settle at or above pre-COVID levels. Before turning the call over to Noel and Brian, I would like to comment on Pegasus. As you may recall, Pegasus is designed to improve operating margins, cash flow, and operating and organizational efficiency. I am very pleased with how well our associates around the world have embraced the Pegasus structural changes and its financial goals. On the structural side, the specific changes we announced in January are working. The new North American regional market organization is expected to take our sales and shopper capabilities to new levels. In our business segments, our brand and category teams are now even more focused on delighting consumers. Similarly, in shared services, our global operations teams are implementing new standardized tools and fully owning our supply chain end-to-end. On the savings side, the set of work streams we are executing under Pegasus are nicely on track. In all cases, our people are flowing to the work; they are demonstrating their adaptability, showing the power of our culture, and executing with excellence. We continue to believe these initiatives will improve profitability and provide significant fuel to make additional growth investments in our flywheel that are intended to drive sustainable long-term growth and value creation. I will now turn the call over to Noel, who will speak more about further progress on several business initiatives, including some that fall under the Pegasus work streams. She will also speak to our business segment performance.
Noel Geoffroy, COO
Thank you, Julien, and good morning, everyone. Echoing Julien's comments, I am proud of our team's focus, dedication, and achievements to date from a wide range of initiatives. I'd like to highlight several of those here including Pegasus. Specific to Pegasus, as expected, we are seeing significant momentum and savings in line with the previously announced target. This continues to help us offset some of the anticipated cost headwinds this fiscal year. Further, the new capabilities and our go-to-market structure, analytics, operations, and finance are expected to help improve our performance and simplify how we work in fiscal '24 and beyond. As a reminder, about 25% of our Pegasus savings is scheduled for this fiscal year, with the largest portion of targeted savings scheduled for realization in fiscal '25 and the remainder in fiscal '26. We intend to use the savings to fuel our value creation flywheel by investing in brilliant marketing and even more consumer-centric innovation to delight consumers and shoppers, and further enhance the capabilities of our regional market organizations and global shared services. We also continue to look for ways to accelerate the savings so that we can reinvest in growth more quickly. One of the key structural changes from Pegasus was the creation of our North American Regional Market Organization or NARMO. On our fourth quarter call, we highlighted the benefits of this organization including securing new distribution, implementing joint business plans with our biggest retail partners, and leveraging shopper data to better identify and act on relevant insights. We recently held our first-ever NARMO sales meeting focused on educating, collaborating, sharing best practices, and rallying behind our brand plans and multi-year innovation pipeline. The meeting was full of energy, pride, and collaboration, and I'm pleased to report that the team has identified and is securing meaningful additional growth opportunities that we expect to contribute to sales longer term. Another Pegasus initiative relates to our Design to Value or DTV initiative. Our DTV approach combines consumer insights to understand what they value most, competitive insights into how other companies' products meet consumer needs, and supplier insights into new technologies and the cost to manufacture. We use this process to elevate and build better. Our team is energized and has several new Design to Value exploratory initiatives underway. These include additional platforming across several different products to standardize select componentry and raw materials, as well as new design engineered to deliver better performance at a lower cost. We are making significant progress on our previously announced nearshore sourcing initiative to grow with existing and new supplier capabilities outside of China. This will help us diversify geopolitical risk, enhance our responsiveness, and reduce inventory. These moves also create value as they can provide quicker transit times, greater speed to market, scale advantages, and process standardization. During the first quarter, we implemented a major piece of our multi-year nearshoring strategy, successfully relocating some production of Hydro Flask bottles to the Western Hemisphere. OXO Pop containers are also expected to begin nearshoring by early fall of this year. I'm also very proud to share that our new Gallaway, Tennessee distribution center, completed in March, was recently awarded the prestigious LEED Silver certification. In addition to its environmentally friendly design, this new facility has significant levels of new capability and automation that will enhance multiple areas of our business for years to come. We now have greater ability and capacity for inline customization and personalization for direct-to-consumer Hydro Flask orders. This enables consumers to make their bottle or tumbler fit their unique personality and needs through engraving, color combinations, and custom accessories like straps, lids, and boot styles. Most recently, in June, we increased our personalization options by adding 86 new designs that consumers can choose from. We are also scaling up our automatic carton packaging system. These machines create custom shipping boxes from continuous feed corrugated cardboard, and each shipping carton is perfectly sized to fit each order. This real-time format change is managed automatically and directly from a database. The equipment offers high levels of flexibility, automation, and speed of processing, and can create one box every few seconds. Our made-to-fit shipper incorporates bumpers into the packaging to protect items from damage during transit while reducing the amount of packing material used. The packaging also offers EVM sealing and resealing for frictionless returns. We launched this better and more efficient initiative on Hydro Flask bottles and are meaningfully reducing carbon emissions and cardboard required by using less filling materials and reducing customer transport volume queue by almost half for our bottles. This capability offers a better consumer experience, improved operational efficiency, and less waste. I would like now to turn to our first quarter business results. Consolidated net sales declined 6.6% and core adjusted diluted earnings per share declined 19.5% in the first quarter. As Julien highlighted, these results were better than we anticipated. Let's start with Home & Outdoor. Osprey performed very well in the quarter, driven by several factors including our improved inventory position compared to fiscal '23 when COVID-related factory closures curtailed supply. We also benefited from new product introductions and accelerated demand in the travel category both in the U.S. and abroad, as well as strong online point of sale and replenishment. Osprey also expanded its number one share position in the U.S. backpack market in the most recent three-month period. The gain was driven by improved supply and product innovation, such as an improved spike in hydration packs, and its extended technical packs to empower people of all shapes and sizes to embrace the outdoors. We expect Osprey to continue to benefit from our better inventory position, a strengthening travel market, our strong innovation, and expanded distribution in both existing and new customers in fiscal '24. The OXO brand also outperformed the market in core categories, even as the overall home category trends continue to normalize from COVID highs and consumer spending shifts toward necessities, travel, and services. Sales were also impacted in the quarter by the timing of some club programs, which fell into the first quarter last year but will fall later this fiscal year. For additional perspective, the kitchen gadgets and dry food storage categories and OXO sales remain solidly ahead of pre-pandemic levels. OXO saw strong point of sale and replenishment from key brick-and-mortar retailers and also benefited from new distribution, including the sell-in for the test of OXO Soft Works at Walmart. OXO's market share growth in both kitchen gadgets and dry food storage in the most recent three-month period was also driven by new product innovation. One particularly successful innovation that launched in May is the OXO Grilling Prep and Carry System designed based on consumer insight aimed at reducing trips from the inside kitchen to the grill. The 4.9-star rated set features nesting containers to prep, marinate, transport, and serve grilled meat and vegetables. It has garnered strong attention on TikTok and has earned a ringing endorsement by the kitchen of a highly respected third-party which called it a game-changing OXO find that is a must-have for grilling season. Turning to Hydro Flask, in brick-and-mortar, the brand faced continued pressure in the quarter from overall softness in the insulated bottles category. Consumer preferences continue to shift away from bottles in the U.S., where Hydro Flask is by far the leader, to tumblers where the brand has a smaller presence. Subsequent to the end of the quarter, Hydro Flask executed a soft launch of the new travel tumbler on June 21 exclusively on hydroflask.com, with great colors, unique engraving customization, and a flexible straw. We are excited by the strong consumer response and are optimistic about growing this new addition to the Hydro Flask family. In March, Hydro Flask introduced a first-of-its-kind stainless steel bottle trade-in and recycling program specifically designed to ensure Hydro Flask products are recycled in an easy and responsible way. The process is simple and straightforward. Consumers register the Hydro Flask bottle, receive and print out a shipping label, and drop it off at the nearest shipping location. No packaging is required. Hydro Flask recycles the products, and the consumer receives a $5 promotional code to use on a future purchase. This illustrates how the brand is participating in the circular economy and is providing a way for consumers to feel better about parting ways with their well-loved Hydro Flask. Turning now to Beauty & Wellness. In our Beauty portfolio, our hair appliances have maintained a strong position, even as the broader category continued to moderate compared to the prior year period. The Revlon Volumizer maintains above 4.5-star ratings with over 330,000 reviews on Amazon alone and multiple industry awards, including four additional awards in 2023 such as the Allure Readers' Choice Award. Appliance category softness was offset by good performance in our Prestige Liquid, which included a full quarter's contribution from Curlsmith compared to six weeks contribution in the prior year due to acquisition timing. Both Drybar and Curlsmith performed well in the quarter, and our new Hot Tools liquids available exclusively at Ulta are resonating with consumers and on track to meet our expectations. We have meaningful new beauty product introductions planned for this fiscal year, including new product line launches and line extensions supported by commercial innovation as well as engaging promotions around major holidays. Drybar's new launches include the smooth shot paddle brush blow dryer, a new addition to our top-selling Drybar detox dry shampoo range, and a line of liquid products designed to offer more thickness and volume. Curlsmith also has a great lineup of new products including effortless waves, flawless finish hair spray, and a new anti-frizz-recipe line. Turning now to Wellness. Our previously announced SKU rationalization program disproportionately impacted our Wellness portfolio. That impact was felt in the quarter on sales, but meaningfully improved the margin profile of the portfolio complemented by strong performance from high-margin Vicks inhalant consumables. Looking at specific Wellness categories, we saw strong thermometry sales outside the U.S. as supply improves. This was offset by softer sales of seasonal fans, air filtration, and humidification products as consumer spending shifted to other categories such as services and travel. Despite overall category declines, Helen of Troy's U.S. market shares remained strong in thermometers, inhalants, and humidifiers, maintaining the number one position among branded products in all three of those categories. In water filtration, we saw some pickup in overall category growth in the first quarter, and PUR made a positive growth contribution for Beauty & Wellness sales. Subsequent to the end of the first quarter, we saw incremental air purification device and filter sales due to the wildfire smoke that blanketed much of the U.S. northeast quadrant and parts of the Midwest in late May and throughout June. We are proud to be able to help consumers and service retailers when they need us most. As these wildfires continue, we will continue to serve the demand. Lastly, on the international front, we achieved sales growth driven primarily by the contribution of Braun, Osprey, Hot Tools, and Curlsmith. Replenishment orders in select brick-and-mortar partners continue to normalize in line with point of sale. Braun outperformed our expectations as we were able to partially overcome continued supply constraints to help meet increased thermometer demand for the brand in EMEA and Asia. With that, I would like to hand the call over to Brian.
Brian Grass, Interim CFO
Thank you, Noel. Good morning, everyone. I look forward to seeing some of you at the CJS Conference tomorrow. As Julien and Noel mentioned, first quarter results exceeded our sales and earnings expectations with year-over-year margin expansion despite unfavorable operating leverage. This outperformance, coupled with meaningful working capital improvement, drove strong cash flow and leverage reduction also ahead of our expectations at this point in the year. Consolidated net sales decreased 6.6% favorable to the 9% to 7% decline we provided in our outlook in April. This reflects the shift of approximately $5 million of sales we previously expected in the second quarter of fiscal '24 into the first quarter. As a reminder, our outlook includes expected declines from our SKU rationalization efforts and the impact of the Bed Bath & Beyond bankruptcy. We saw favorable performance from key brands in both business segments, international, and the online channel. In Home & Outdoor, OXO exceeded our expectations despite the decline in club channel programs year-over-year, and Osprey growth was driven by strong consumer demand for travel related products. In Beauty & Wellness, demand for Braun thermometry drove year-over-year growth, especially in international markets, and high water filtration demand drove growth in PUR. Our prestige beauty brands, Drybar and Curlsmith, continued to drive underlying growth and improve our mix with distribution expansion and innovative products that resonate with consumers. Gross profit margin improved 380 basis points to 45.4% compared to 41.6% in the same period last year in line with our expectations for the quarter. Year-over-year improvement was due to a more favorable product mix in Beauty & Wellness driven by Pegasus SKU rationalization and a more favorable customer mix in Home & Outdoor, lower inbound freight costs, and the favorable comparative impact of EPA compliance costs of 180 basis points incurred in the same period last year. GAAP operating margin for the quarter was 8.6% compared to 6.7% in the same period last year. We were pleased to expand adjusted operating margin by 30 basis points to 13.9% despite unfavorable operating leverage. The primary drivers of this improvement were a more favorable product mix within Beauty & Wellness, reflecting the benefits of SKU rationalization, a more favorable customer mix within Home & Outdoor, and lower inbound freight costs. These factors were partially offset by higher inventory reserve expense, increased annual incentive compensation expense, and an increase in outbound freight costs. On a segment basis, Home & Outdoor adjusted operating margin decreased 30 basis points to 15.8% driven by higher distribution expense, increased marketing expense, higher inventory reserve expense, and an increase in outbound freight costs and unfavorable operating leverage, partially offset by a favorable customer mix and lower inbound freight costs. Adjusted operating margin for the Beauty & Wellness segment increased 80 basis points, reflecting a more favorable product mix driven by our SKU rationalization efforts, lower inbound freight costs, lower distribution expense, reduced marketing expense, and a decrease in legal fees. Net income was $22.6 million or $0.94 per diluted share. Non-GAAP adjusted diluted EPS decreased 19.5% to $1.94 per diluted share, primarily due to higher interest expense and lower adjusted operating income in Home & Outdoor. Cash flow in the quarter was strong. We generated $121.1 million of operating cash flow with a sequential decline in inventory of $21.6 million, among other working capital improvements. Inventory at the end of the first quarter was $433.9 million, on track with our objective to reduce inventory to $400 million or below by the end of fiscal '24. We generated $109.2 million of free cash flow ahead of our expectations for the quarter. We ended the quarter with total debt of $837.2 million, a sequential decline of approximately $97.3 million. Our net leverage ratio improved to 2.56 times compared to 2.81 times at the end of the fourth quarter. At the beginning of the first quarter, we swapped an additional $200 million of our outstanding variable rate debt to fixed rates, bringing the fixed rate total to $625 million or 75% of our total debt outstanding. At the end of the first quarter, our debt covenants allowed for additional borrowings of up to $343 million and the amount available for borrowings under our credit agreement was $638 million. We believe we remain on track to reduce our net leverage ratio to between 2 times and 1.85 times by the end of fiscal '24, not including any benefits from facility footprint optimization efforts that are underway. Turning to our outlook for fiscal '24, we are maintaining our full-year expectations. While we are pleased to have outperformed our expectations in the first quarter, at this point in the year, we are maintaining our flexibility to use the overperformance to fund incremental growth investments in our most attractive brand opportunities or as an offset to potential further consumer spending softness. We will continue to assess our algorithm for balancing investment spending and earnings growth as the year progresses. Our view on a significant or prolonged recession has not changed and that it cannot be reasonably estimated and therefore it is not included in our outlook. We are encouraged by the continued overall improvement in trade inventory on a sequential basis and believe that when consumer demand does strengthen, we are well-positioned with a diversified product portfolio and sufficient inventory to serve that demand. We continue to expect consolidated sales between $1.965 billion and $2.015 billion in fiscal '24, implying a decline of 5.2% to 2.8%, which continues to reflect the estimated unfavorable year-over-year revenue impacts of our SKU rationalization efforts and the bankruptcy of Bed Bath & Beyond of approximately 3.4% combined. In terms of our net sales outlook by segment, we expect the Home & Outdoor decline of 1.7% to growth of 1%, and the Beauty & Wellness decline of 8% to 5.8%. We believe we remain on track to deliver our gross margin expansion target of approximately 460 basis points at the high end of our guidance range as we drive improvement in product and customer margin mixes, disproportionately feed our highest margin businesses from an investment perspective, and realize the benefit of lower commodity and inbound freight costs. We expect GAAP diluted EPS of $3.81 to $4.67, which includes the estimated balance sheet impact of the Bed Bath & Beyond bankruptcy of $0.17, and estimated restructuring charges of $2.75 to $2.43. We continue to expect non-GAAP adjusted diluted EPS in the range of $8.50 to $9, which implies a decline of 10.1% to 4.8%. Our adjusted diluted EPS outlook continues to include an increase in interest and depreciation expense totaling approximately $0.91 net of tax or a 9.6% growth headwind. Our outlook continues to reflect operational earnings growth despite unfavorable operating leverage. At the high end of our outlook range, adjusted EBITDA is expected to grow approximately 6.3%, and margin is expected to expand by approximately 150 basis points despite incremental annual incentive compensation expense of approximately $27 million year-over-year, which represents an 8.2% growth headwind and 135 basis point margin headwind. Our outlook for operational earnings growth is driven by a better overall margin mix, lower commodity and inbound freight costs, and cost savings from Pegasus, which remains on track. We expect Pegasus to be a force multiplier with benefits in fiscal '24 to include initial cost savings, organizational and go-to-market effectiveness, more efficient and effective marketing spend, and optionality to consider opportunistic incremental growth investments during the year. We continue to expect Pegasus to generate savings of approximately $20 million in fiscal '24 with additional savings expected from lower inbound freight and commodity costs. As previously discussed, the Pegasus savings will partially offset several structural headwinds in fiscal '24 including incremental depreciation expense of approximately $12 million before tax, related to our new state-of-the-art distribution facility, higher annual incentive compensation expense of approximately $27 million before tax as we reinstate expected expenses at target performance, and higher interest expense of approximately $15 million before tax as we annualize the increase in interest rates in fiscal '23. This concludes our expectation of cumulative incremental rate increases of 100 basis points in fiscal '24. Moving on to our tax outlook, we now expect a GAAP effective tax rate range of 21% to 19% for the full fiscal year '24 and a non-GAAP adjusted effective tax rate range of 13.5% to 12.5%. In terms of quarterly cadence, we continue to expect the majority of our net sales growth to be concentrated in the third quarter of fiscal '24 and expect a decline of approximately 8% to 6% in the second quarter. This reflects the shift of approximately $5 million in sales from the second quarter into the first quarter that I mentioned earlier. We expect adjusted diluted EPS growth to be concentrated in the third and fourth quarters of fiscal '24 as we benefit from lower inbound freight and commodity costs. We also expect to realize the benefits of debt deleveraging more fully in the second half of the year. Accordingly, we expect a decline in adjusted diluted EPS of 20% to 30% in the first half of fiscal '24, with near offsetting growth in the second half of the year. We continue to expect capital asset expenditures of between $45 million and $50 million for fiscal '24, which includes approximately $25 million for the completion of our new distribution facility and the full installation of state-of-the-art automation equipment. We continue to expect that the final cost of the facility and its equipment will be within our original expectations. With lower CapEx needs in fiscal '24, we continue to expect free cash flow to be in the range of $250 million to $270 million, and net leverage ratio improvement to between 2 times to 1.85 times by the end of fiscal '24. We continue to assess opportunities to further optimize our facility footprint, which we believe could unlock an additional $100 million to $125 million of cash flow that is not currently included in our outlook. In summary, we are pleased to reiterate an outlook that we believe is accretive to our current valuation with strong free cash flow, operational earnings growth, and margin expansion despite a challenging consumer environment. We remain very excited about the opportunities that Pegasus provides to drive further performance improvement in fiscal '24 and beyond. Finally, we believe our strong cash flow and asset optimization efforts will allow us to continue to meaningfully reduce our debt leverage and consider capital deployment optionality going forward. And with that, I would like to turn it back to the operator for questions.
Operator, Operator
Thank you. At this time, we will be conducting a question-and-answer session. Our first question today is from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.
Rupesh Parikh, Analyst
Good morning. Thanks for taking our question, and also congrats on a nice quarter. So I just wanted to go back to the Hydro Flask brand. So there seem to be positives and negatives right now for the brand. Your tumbler launch seems like it's off to a good start. At the same time, we are seeing discounting in the channel for the product. So I just wanted to get a sense of the overall health of the brand and your updated expectations for Hydro Flask this year.
Julien Mininberg, CEO
Great. Good morning, Rupesh, and hi to everyone. Noel, please go ahead.
Noel Geoffroy, COO
Hi, Rupesh. Good to hear your voice. On Hydro Flask, I would say, as I outlined in the script, we continue to see consumers shifting from bottles, where Hydro Flask is by far the leader, to tumblers in the quarter. But as you outlined, we were really pleased to do an initial soft launch of our travel tumbler in June, so just past the end of the quarter, and we are really encouraged by the early sales results from that. Consumers are reporting that they are really pleased with the functionality of what we've put out there, and we see it as a really nice momentum piece for us for the balance of this fiscal year. I also mentioned a couple of other initiatives on Hydro Flask. We greatly enhanced our personalization and customization offerings, and we got out there with the bottle return program. So, a lot of positive news happening on Hydro Flask right now, and we see that as strong building blocks to strengthen kind of the performance in the back half of the year across the brand in total, especially entering into the tumbler piece of the market that's been growing.
Brian Grass, Interim CFO
Just to handle the promotional question, Rupesh, I would say the promotional activity is kind of normal for us. We did a MAP pricing holiday during the quarter, and that's pretty much standard. And then, we do promotions really to get out of colors that we're discontinuing and get into new colors and new items. So, I would call both of those activities, the MAP program and the kind of rotating into new products, both normal promotional activity.
Rupesh Parikh, Analyst
Right. And just, Brian, related to Hydro Flask, I believe your expectation was for growth for the full year. Is that still the expectation?
Brian Grass, Interim CFO
Slight growth to flattish, I would say, and that's still our expectation. We're excited about the traveler, but we have not factored in a meaningful upside into our forecast from it. At this point, we are encouraged by it, but we're going to let it evolve. And I just want to point out, we did a soft launch online. The retailers are very excited about it, but we want to let it play out a little bit before we start leaning in more.
Rupesh Parikh, Analyst
Great. Thank you. I’ll pass it on.
Operator, Operator
Our next question is from the line of Bob Labick with CJS Securities. Please proceed with your questions.
Peter Lukas, Analyst
Yes. Hi. Good morning. It's Pete Lukas for Bob. You gave us a lot of detail on Project Pegasus, obviously seeing significant benefits to the margin profile. What has surprised you the most in terms of the rollout, either positively or negatively, and what are the biggest things you've learned so far?
Julien Mininberg, CEO
Hi, Pete. Nice to talk to you, and always a pleasure to have CJS represented as well. In terms of Project Pegasus, I think the most positive, as we've mentioned in our prepared remarks, is how well the organization has embraced the full scope. This is not a standard belt-tightening exercise as we've talked about from the very beginning back in October; for Pegasus, this is a comprehensive restructuring and reinvention, very similar to what we've done multiple times of always taking the company up to the next level. The single most important thing is how well the organization has embraced it, dug deep, and has not only made the structural changes but also aggressively pursued the specific work of each work stream and their financial targets. And Noel, I suspect you'll be able to elaborate a bit on the Pegasus momentum.
Noel Geoffroy, COO
I would echo Julien's comments; I think the piece on a program like this is always the question mark of how will the organization react. I'm delighted, I mentioned in my remarks, the first-ever North American RMO sales meeting that we just had to see the teams come together. The business unit is very focused on sharpening their brand plans, sharpening their innovation pipeline. The North American RMO and the audience is excited about those plans coming forward with new growth opportunities and growth ideas as they look across the full portfolio was very, very encouraging. I think a testament to the choices that we made in the organizational structure. As I look at some of the other work streams, again, SKU rationalization was a big focus area, and the team really took that to a great bottoms-up analytical rigor that has really helped us from a gross margin standpoint on parts of our portfolio. So that's been a real positive as they've embraced that work. We've got a lot more work streams that are still underway that will come. As a reminder, the bulk of the savings comes in fiscal '25 to fuel our initiatives in that timeframe. We are very pleased with the momentum that we see across all of the work streams.
Peter Lukas, Analyst
Very helpful. Thanks. I'll jump back in the queue.
Operator, Operator
Our next question comes from the line of Olivia Tong with Raymond James. Please proceed with your question.
Devin Weinstein, Analyst
Hi. This is Devin Weinstein on for Olivia. I appreciate you taking our question, and congrats on another unexpected quarter. I wanted to ask a little bit more about your outlook for the year, specifically for Q2. Understood on the components impacting the $5 million impact on your sales outlook. But you did maintain the EPS guide for the first half to decline 20% to 30%. I just want to understand some of the dynamics going into your Q2 outlook saying as sequentially, there should be some cost easing. It sounds like sell-in and sell-through are in a much better place. So outside of maybe the sales comp, what are some of the dynamics impacting that Q2 outlook that would get the first half to be down 20% to 30%?
Brian Grass, Interim CFO
Yes. There are several factors to consider in your question. You're talking about sales, which should be straightforward. The only adjustment to our outlook is the $5 million shift to Q1. I hope that clarifies things. I believe there are no other significant factors regarding sales. As for adjusted EPS, there are two main components. We are maintaining our original guidance, which indicates a decline of 20% to 30% for the full year. After reviewing Q1, we exceeded our expectations slightly. We anticipate some spending shifts and growth investments that we chose not to execute in the first quarter but plan to in the second quarter. Therefore, for the full first half of the year, we will remain in the 20% to 30% range, despite a slightly better performance in Q1. We do predict that our results in Q2 will dip a bit as we invest more into ongoing strong initiatives like the tumbler rollout and new product introductions.
Devin Weinstein, Analyst
That makes sense. Thank you. And if I could just tack on the second part of that question. You guys did call out some of the wildfire dynamics that impacted demand for air purifiers. Just curious what you're seeing quarter-to-date; when we've looked in the past, we've seen a good bump in your sales for heightened wildfire seasons. So curious if you're seeing that same sort of dynamic or perhaps if there's just been more air purifier purchases over the course of COVID and maybe people who want one already have one in the household, or if there's potential for new customers that enter your brand?
Noel Geoffroy, COO
In terms of air purification, the Canadian wildfires significantly affected us in May and June, mainly after the end of our first quarter. I want to point out that U.S. wildfires are currently below average for this time of year. Considering the heavy snowfall on the West Coast this past winter, the season has started slower, with fire incidents well below the second lowest levels seen in the last decade in the U.S. While Canada has high activity, the U.S. has lower occurrences, creating some offsets. Despite this, sales for air purifiers have risen in recent months. The air purification category has relatively high retailer inventories, an issue we've previously discussed, stemming from excess inventory built up during COVID. The positive aspect is that retailers are beginning to manage this inventory. We have observed an increase in sales for this category recently, particularly in the last month and a half after the first quarter. We have adequate inventory on hand and are happy to support retailers and consumers during this ongoing period.
Devin Weinstein, Analyst
Super helpful. Thanks so much, and congrats again.
Brian Grass, Interim CFO
Great. Thank you.
Operator, Operator
Our next question comes from the line of Peter Grom with UBS. Please proceed with your question.
Peter Grom, Analyst
Thanks, operator, and good morning, everyone. So I have one maybe follow-up and then just kind of my real question, I guess just a follow-up on Q2. Just the outlook still implies a pretty wide range for earnings, especially considering we're pretty close to halfway through the quarter. At this point, can you maybe just help us understand the building blocks between the high end and the low end and maybe the key watch points, or is it fair to say that you would probably expect to be at the stronger end of that range? And then, I guess my real question is just shifting gears like consumer demand. Obviously, a lot of concern around what that looks like as we move forward. But it seems at least based on what you just delivered this morning and your comments can be faring better than you expected. So just a broad-based question, but you have a portfolio with a lot of different categories. Can you just give us a sense of what you're seeing around the health of the consumer and broader demand? Are some categories seeing improved performance quicker than you would have anticipated or some more challenged? And just would be curious how the demand environment is evolving versus your expectations, especially considering that there are some other companies that are pointing to a more prolonged period of depressed top-line growth? Thanks.
Julien Mininberg, CEO
Hi, Peter. Julien here. Thanks for the question. Given there are two parts to it, let's split up the answer. Brian will definitely be able to address the range on Q2, and then we'll talk about the demand part just afterwards.
Brian Grass, Interim CFO
Yeah, Peter. The wider range is really centered around investment spending and the timing of that investment spending, and there's a lot of moving parts as you called out when you were asking the question about consumer demand. So we have a lot of initiatives going and a lot of positive momentum going in the right direction on things like the traveler. The timing of when that gets into the retailer and when we really want to drive demand can fluctuate between the second quarter, third quarter, and so on. So, there is a range of outcomes for the second quarter that is largely based on the timing of our investment spend and when it will follow exactly. And in a matter of weeks, could make a shift between Q1 and Q2. That's really what we are dealing with here because that is such a new item, and it's actually hitting retail towards the end of the second quarter, and it will hit some retail before other retailers. So hopefully, you can imagine that there's a period of time that could overlap just by a matter of several weeks, which could make a difference to the quarters. That's why there's kind of a wide range of outcomes. We can't perfectly predict when the timing will be exactly about that.
Julien Mininberg, CEO
Great. And on the demand subjects, I think the simplest thing we can say is that everyone on the call, I think, in the market broadly is aware of the choppiness in predictions and pressure that's on the consumer at the macro level, the famous inflation and higher interest rates, the 'higher for longer' speech that the Fed has reiterated month after month. In the case of these categories to your specific question, we're in a broad set of categories. Some of them are just feeling the pain of that discretionary reduction as buying patterns shift. Others, like outdoor products, for example, are seeing the benefits of the megatrend of the outdoors. Prestige beauty is generally doing better, and then in the world of COVID flu, it's off-season right now. It's hard to tell, and these things go up and down. In terms of what it means for us, I think the simplest thing I can say is we just reiterated our sales guidance today, and all of that was considered when we put that number forth.
Peter Grom, Analyst
Great. Thanks so much. I’ll pass it on.
Julien Mininberg, CEO
Sure. Thank you, Peter.
Operator, Operator
Our next 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, and great job on the quarter. I was wondering about the inventory levels; it's good to see them reduced significantly. Are you still aiming to be under $400 million by the end of the year? Also, I'm curious about the SKU rationalization; how much of that is completed so far, and how much remains for the rest of the year?
Brian Grass, Interim CFO
Yeah. I think we're still on track with our goal. The implied in our cash flow range of $250 million to $270 million. Obviously, to be at the $270 million, we'd have to be at the $400 million or maybe slightly below. If we could end up maybe a little bit higher than that, which would put us in the $250 million cash flow range for the year. So, I think we're comfortably within that range. We could end up at $410 million or $415 million by the end of the year. If we do that, it would be a good reason for it. It will be because we're leaning into opportunities, and we want to have the inventory to be prepared to shift to those opportunities. If we don't have incremental opportunities like that, then we'd be likely closer to the $400 million. So I think we would toggle within that range by the end of the year, and we're definitely on track to do that.
Noel Geoffroy, COO
In terms of SKU rationalization, as we mentioned, overall, the SKU rationalization initiative touched the Wellness portfolio more than the others, but that's where the impact was felt the greatest, and it did start to impact us in Q1, as we mentioned in the remarks. I would expect to see that kind of continue and take into our outlook for the remainder of the year as those choices flow through throughout the remainder of the year. Again, the emphasis is more on wellness than the others, although there are some impacts across the board as we look; we really did a comprehensive look bottoms up of the entire portfolio.
Susan Anderson, Analyst
Great. And then, if I could just add one follow-up on the hair appliances. It sounds like you mentioned that Prestige was performing better. Was that also in the appliances? Are you seeing Drybar perform better than the lower-cost tools? And then, I was curious; I know you rolled out that lower-cost tool at Walmart. I was curious how that's performing. And then if there's any newness also coming in hair tools as we kind of look to the back half that to maybe re-jump-start that category?
Noel Geoffroy, COO
In hair tools, yes. Overall, if we look kind of big picture, Prestige or the higher-end hair tools are performing better than the kind of mid-tier hair tools. So Drybar, etc., in that realm is performing stronger as you think about kind of a more affluent consumer having more discretionary spend to continue purchasing in those areas. We do have a lot of new innovation coming out. The one I mentioned in the remarks on Drybar is a smooth shot paddle brush that kind of continues up in that one-step insight that has worked so well for us. That's a new one that's coming out there in addition to a range of very different Drybar Liquids. When it comes to the mass part of the business, we have gotten the new planograms into some of our mass merchandisers that I've mentioned in previous quarters. We're seeing point of sale pick up very nicely as we've gotten that new range in. So we're encouraged by what we're seeing there.
Susan Anderson, Analyst
Great. Thanks so much. Good luck for the rest of the year.
Noel Geoffroy, COO
Thanks, Susan.
Operator, Operator
Our next question is from the line of Anthony Lebiedzinski with Sidoti & Company. Please proceed with your question.
Anthony Lebiedzinski, Analyst
Good morning. Thanks for taking the questions, and nice start to the fiscal year. So just a quick follow-up first as far as the SKU rationalization. I guess if we were to think about this in baseball terms, are you guys like in the early innings of that process or middle? How should we think about that?
Brian Grass, Interim CFO
In terms of cadence of impact, Anthony, we're in early innings because we're really just realizing a lower weighted impact in Q1. It will get a little bit heavier in terms of impact through the remainder of this year. It just so happens it was spread where the majority of the impact will fall in this fiscal year. It was a little lighter in Q1 and will get a little heavier Q2 through Q4, and then we'll be through it. Now, as we talked about in the past, this is something we're going to continue to do. We don't know at this stage if it will be meaningful enough that we'll continue to call it out going into fiscal year '25 based on whatever we find through the results of the process. But the majority of the impact from this initial SKU rationalization effort will be in fiscal year '24. It was a little lighter in Q1 and will get a little heavier in the remaining quarters.
Anthony Lebiedzinski, Analyst
Got it. If I could squeeze one more question. As far as your outlook for M&A, just how should we think about that? And then, as far as acquisition multiples, have you seen any changes?
Julien Mininberg, CEO
So Jack will speak a little bit to acquisition multiples; the spoiler alert is they're generally coming down. Obviously, interest rates are going up and valuations are coming down; it’s broadly known, but not specifically deal by deal, just as a macro comment. In terms of our capital allocation, which is to me as a broader question, we're very pleased that our strategy is working, which is to reduce our inventory, improve our cash flow. You saw that in the numbers that we reported today where we've made significant progress not just in this quarter but now also on top of the big progress that we announced in April for Q4 of last fiscal year. As we continue towards the guidance we reiterated today, it opens up possibilities for additional capital deployment. So per our strategy, M&A in the form of acquisition and also the potential for opportunistic buyback, and we consider these things all the time. In the case of operational needs, we don't be on the big warehouse have another big investment in the short term, so that helps us as well. And I will give it to Jack on the subject of what's out there.
Jack Jancin, Senior Vice President of Corporate Business Development
We're seeing more deal flow has been picking up recently than maybe over the last six months and expect that there will be even more as the rest of the balance of this year continues. I think for us, we're going to continue to stay in touch. We're going to look at the different options that are out there. Part of when it's right for us to do it is going to be when the organization is ready; we're still in the midst of Project Pegasus. It is going very well. What we don't want to do is create any additional compression. We'd rather do that well, do it right. Some of our priorities are to get that level down. That being said, we're seeing some of the assets that are transacting out there, and we are seeing multiples coming down.
Anthony Lebiedzinski, Analyst
Understood. Thank you, and best of luck.
Julien Mininberg, CEO
Great. Pleasure, Anthony.
Operator, Operator
Thank you. Our final question is from the line of Linda Bolton-Weiser with D.A. Davidson. Please proceed with your question.
Julien Mininberg, CEO
Hi, Linda.
Linda Bolton-Weiser, Analyst
Hi. Congratulations on a solid quarter. I was curious about the gross margin expansion, which was quite impressive. You mentioned there might have been a benefit from lower EPA repackaging costs. Can you provide more details on the rest of the margin expansion? Specifically, how much was due to product mix, and what was the impact of freight and commodity costs? Is there a way to quantify the overall gross margin expansion for the quarter?
Brian Grass, Interim CFO
I mean, we gave you, I think it was 180 basis points of expansion related to the EPA, the lack of having those costs year-over-year, so that's roughly half. I think you could or a little less than that, actually. I think you could split the remainder up between the margin benefits and commodity and freight costs. I think it's fair to kind of do a 50-50 split of the remainder.
Linda Bolton-Weiser, Analyst
Okay. And then, I think you kind of mentioned somewhere in your commentary about the facility rationalization, those excess distribution facilities that you have now? Is there any additional movement on what might be done with those or anything to report on that front?
Brian Grass, Interim CFO
Yeah. I would say they're at different stages in the process. There is one of the smaller of the two that is further along. We have formal indications of interest and are working towards something that's more definitive and we're making good progress on that one. I'd say there's one that if we can make everything aligned, there could be a closing in the third quarter. The other one is not as far along, but we're still moving on a very good path. If we have something to report, we'll share that with you at the appropriate time, but we're making good progress on both.
Julien Mininberg, CEO
There's a big picture comment here. We've been saying for a couple of quarters that with the opening of our new state-of-the-art big facility, the 2 million square footer in Tennessee, it creates these opportunities. So hopefully, people are not surprised that we're now optimizing. I think it's where we've used multiple quarters of the footprint. So there's multiple possibilities, as Brian was talking about. I think it's good news; it's good for ROIC, it's good for efficiency, and then, ultimately good for cost.
Linda Bolton-Weiser, Analyst
Great. And then finally, can I just ask on the Hydro Flask on the consumer shift in preference from bottles to tumblers? What exactly is driving that? Is that more in line with sedentary behavior using a tumbler instead of the bottle? What is driving the underlying consumer preference at this point?
Noel Geoffroy, COO
My feeling, Linda, is the functionality of it for a range of different activities that consumers are taking on. I think probably one of the biggest ones is sitting in a cup holder. So, as consumers go from activity to activity, whether that's to the office or to kids' sporting events or to the gym or the grocery store, I mean you name the activities that your average consumer is kind of transporting themselves or their families around; fitting into a cup holder, having a handle, the ease and the preference of drinking from a straw. I think it's the combination of things. Any one of these things can be available in a bottle, but there's something about this particular travel tumbler design that encapsulates all of them in one. This is in the cup holder, has the handle, has the straw, and it's just really resonated and fits consumers' lives.
Linda Bolton-Weiser, Analyst
Got it. Thank you very much.
Julien Mininberg, CEO
Pleasure, Linda. Thank you.
Operator, Operator
Thank you. This concludes our question-and-answer session. I'll turn the floor back to management for closing remarks.
Julien Mininberg, CEO
Great. Thank you, operator, and thank you, everyone for joining us today. We're very excited about the quarter and beginning to demonstrate the consistency that I know everyone is looking for starting with us. We look forward to speaking with many of you in the coming days and weeks. There are several forums, whether they're conferences or NDRs, and we're out of our quiet period now. So we're looking forward to talking about them, start talking during those and also other conversations with many who would like them. So with that, we say thank you and have a wonderful day.
Operator, Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.