Does Helen of Troy’s Unusual Options Activity Points to a Bearish Spring?

Will Ashworth - Barchart - Thu Feb 2, 2023

Texas-based consumer products company Helen of Troy (HELE), whose brands include OXO, Osprey, Hot Tools, and Dry Bar, experienced unusual options activity on Wednesday with 13,734 options traded, 4x the 30-day volume.

Investor sentiment might be turning negative. Over the past three trading days, Helen of Troy’s average daily options volume was 10,143. HELE's daily volume last hit 10,000 in mid-December. Over the past year, its volume has been greater than 10,000 on three occasions: Jan. 31 and Feb. 1, 2023, and Dec. 16, 2022.

The options activity of the past two months points to greater investor interest.

In Wednesday’s trading, 95% of its options volume was for the May 19 $70 put option. The volume on this contract was 80.34x the open interest, making it the third-highest Vol/OI ratio on the day.

There are two ways to interpret this unusual options activity.

It could suggest investors believe HELE stock is ready for a big fall. But, on the other hand, it also could indicate that investors think the worst has passed, providing an easy income-earning proposition over the next 107 days.

Here’s my take on both.

The Worst Has Yet to Come

While tech stocks have seen most of the layoffs in recent months, other industries are getting hit by the uncertainty of higher interest rates and lower revenue and profit growth.

In early January, Helen of Troy announced that it was laying off 10% of its workforce to rightsize its business.

“‘The new structure will reduce the size of our global workforce with impact across all business segments, departments and shared services,’ CNN Business reported COO Noel Geoffroy said during its Jan. 5 Q3 2023 conference call. ‘We did not take this decision lightly.’”

The layoffs came at the same time it released its Q3 2023 earnings. They could have been better relative to a year ago.

On the top line, its core sales fell 10.0% to $558.6 million. They were down 9.6% from Q3 2021 but up 23.9% from Q3 2020. Over 36 months, it’s only been able to add $108 million in sales to its overall business.

On the bottom line, its non-GAAP core adjusted earnings per share (EPS) in the third quarter was $2.75, 26.1% less than a year ago, 23.8% less than Q3 2021, and 7.7% down from Q3 2020. Over 36 months, it’s been able to add just 20 cents to its quarterly EPS.

With no growth to speak of on the bottom line, job cuts were inevitable in this economic environment.

As a result of Helen of Troy’s mediocre revenue and earnings growth over the past three years, it’s easy to see in hindsight why its share price has fallen by 53% since hitting an all-time high of $256.26 in December 2021.

The Job Cuts Signaled a Bottom

Although HELE stock bottomed at $82.94 in September, the job cuts announced in early January appear to be an official admission by the company that its growth isn’t good enough to justify the higher headcount.

How many people is 10% of its headcount? Statista says it had 2,146 at the end of fiscal 2022 (February year-end), so approximately 215 people will lose their jobs by March 1.

On the plus side, the company says it will save between $75 million and $85 million annually from its rightsizing. In addition, based on $2.04 billion in projected 2023 revenue and a 30% selling, general, and administrative (SG&A) margin, the cuts would reduce its SG&A expenses by 13%, possibly more.

That will help bolster the bottom line in future years.

In the meantime, it should finish fiscal 2023 by earning approximately $224 million [$9.30 per share at the midpoint of its guidance multiplied by 24.1 million outstanding shares] or 11% of sales. Admittedly, that’s not nearly as good as its 13.6% margin in 2022, but it’s still double digits.

If you look at the company’s top and bottom-line growth through the first nine months of 2023, relative to the same period in fiscal 2020 before the pandemic, there are signs that it will regain growth once inflation has returned to more historically average readings.

The question is whether that will be in calendar 2023 or later.

Management isn't waiting for the answer. So their preemptive cut should pay dividends in the future.

The Bottom Line

Given how far HELE stock has fallen over the past 13 months, I could see investors selling May 19 $70 puts on Wednesday to earn a little income over the next 3.5 months. Admittedly, at $85 per contract, it's not much, but it seems hard to imagine that the stock will fall back to September levels over the next 107 days.

Way out of the money, I doubt many investors were buying these puts Wednesday, thinking its share price would crater nearly 40% by May. Not after Helen of Troy cut staffing by 10%.

Wednesday’s unusual options activity was a good head fake. It screamed bear but was bullish. Today’s nearly 8% jump through midday trading would suggest I’m right.

Under $100, Helen of Troy makes an excellent stock to own.

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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.