Tupperware Brands Corp. (NYSE:TUP) is recognized as a leader in kitchen and home storage products. Following years of weak and declining sales, the company is undergoing a turnaround with a new management team focusing on operational efficiencies and improving financials. Indeed, the stock is up over 300% this year with a recognition that conditions have stabilized and value is being unlocked with significant growth opportunities. While the pandemic caused some disruptions to the business in the first half of the year, the company recently reported its Q3 earnings highlighted by a solid rebound in growth with significant progress made in its cost savings initiatives. We are bullish on shares and see more upside through next year with an accelerating earnings outlook.
Q3 Earnings Recap
Tupperware reported its Q3 earnings on October 28th with non-GAAP EPS of $1.20 which beat expectations by $0.79. Similarly, GAAP EPS of $0.65 was $0.29 ahead of market estimates. The stronger-than-expected result was driven by a massive top-line revenue figure of $477 million, which climbed by 14.1% year over year and well above expectations of $364 million. In constant-currency terms, sales grew 21% year over year across the global operation.
(source: Company IR/Annotation by BOOX Research)
The North America region led growth, with sales at $146 million, up 42% year over year. There was also strong momentum in Europe and South America with sales up 25% and 36% each respectively in local currency. On the other hand, APAC was a soft point with sales down 7% compared to the period in 2019.
A key driver was the growth in the average active sales force, up 10%, and the sales per active sales force also climbing 10% boosted by the utilization of new digital tools and marketing techniques required during the pandemic. Management explains that changing consumer dynamics with people spending more time at home and cooking for themselves have supported the overall operating environment.
The story here was significant margin improvement as the gross margin at 68.1% climbed 190 basis points from Q3 2019, reflecting lower manufacturing costs and product mix. Management highlighted that the core resin input used to make the majority of the storage containers is down on a year-over-year basis. Delivery, sales, and administrative expenses fell 3.2% y/y in Q3 and also 8.9% lower through the first nine months. The result is that the operating margin at 11.6% in Q3 and 10.6% year to date are both up materially compared to 2019.
As mentioned, a new management team has been a major development this year starting with the hiring of new CEO Miguel Fernandez in March who previously worked with related multi-level marketing companies Herbalife (HLF) and Avon Cosmetics. Immediate efforts at corporate headcount reductions and a plan to sell some real estate assets helped with liquidity conditions as the pandemic intensified in Q2. In the context of the broader turnaround plan, the company is on track to save $180 million this year. From the conference call:
Our Turnaround Plan cost savings initiatives were developed to right size and structurally address our problems. And I am happy to report that in the third quarter, SG&A as a percent of sales was 49%, reflecting a 900 basis point improvement attributable to the positive impact of nearly $60 million of Turnaround Plan cost savings in the quarter. Year-to-date we have achieved $120 million of our gross $180 million goal.
(Source: Company IR)
The company continues to prioritize debt repayment and deleveraging. In Q3 the company reduced its outstanding notes balance by $121 million as it generated $107.8 million in cash flow from operations and $91.1 million in free cash flow. To that point, the company ended the quarter with $148.8 million compared to $768.1 million in gross debt. Considering adjusted EBITDA over the trailing 12 months at $206.6 million, Tupperware reports a debt to adjusted EBITDA leverage ratio at 3.7x, which is below the company covenant requirement of 5.25x.
While the company is not offering forward guidance, comments by management suggest it expects the current positive trends to continue through next year.
According to consensus estimates, considering the weaker first half of the year, Tupperware is forecast to reach $1.7 billion in revenues for 2020 representing a 5.5% decrease compared to 2019. Consistent with the turnaround plan and cost-cutting initiatives, an EPS estimate of $2.98 for this year, if confirmed, would be a 638% increase compared to 2019 which included several impairment charges.
Looking ahead, the market sees the operating and financial environment as stabilizing with 9% revenue growth in 2021 and a 3% EPS increase which would face a difficult comparable period against the strong 2020 results.
Analysis and Forward-Looking Commentary
The momentum in shares of TUP has been impressive, up over 65% just since the release of the Q3 earnings. Still, keep in mind that the percentage changes here are magnified considering the extreme level of volatility the stock has experienced in recent years.
At its core, this is a turnaround story and the market appears to be recognizing that the company is now on the right track following years of declining growth and ballooning debt. In 2019 revenues declined by 13% and the stock was separately pressured by an accounting investigation into its operations at its “Fuller” subsidiary in Mexico. The company suspended its dividend back in Q4 2019 to preserve cash, and there was a real concern that bankruptcy was imminent. With the extreme level of market volatility in Q1 of this year, shares of TUP traded as low as $1.53 and down by as much as 95% from its high in 2017. By this measure, Tupperware has already turned the corner.
Compared to its traditional marketing strategy led by face-to-face distribution from an independent sales force, efforts to adopt more digital tools are proving to be successful. Efforts aimed at targeting social media platforms, digital influencers, and an improved e-business platform are working to keep the company relevant. Overall, we are encouraged by the results and think the current management team will be able to generate value for shareholders.
(Source: Company IR)
Excluding 2019 when earnings were materially impacted, we highlight that shares of TUP over the past decade have traded at an average P/E of 15.5x. In this regard, the current valuation with TUP trading at a forward P/E of 11.8x 2020 consensus EPS and 11.5x based on 2021 EPS estimate suggests the stock still has value at the current level despite the recent rally.
Getting past this year, we argue that TUP can command a higher premium going forward if it can in fact generate consistent growth in the mid-single digits and even higher earnings with firming margins. We think that the company may have room to reinstate its dividend in 2021 as a sign of the improving outlook and the commitment to reward shareholders.
The risk here beyond a deterioration to the global macro environment is that growth underperforms and the earnings recovery falters. The stock would again face renewed bearish sentiment if margins weaken from here forcing a revision lower to long-term estimates. Monitoring points for the upcoming quarters include momentum in regional sales along with the balance sheet position.
Overall, we are bullish on TUP based on the continued value and rate shares as a buy with a price target of $40.00 for the year ahead, implying a 13x multiple on the current 2021 consensus EPS. In our view, the company is well-positioned to exceed estimates by building operational and financial momentum. The company should also benefit from an improving macro outlook and global growth recovery.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TUP over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.