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Tupperware: Bottom Falls Off, Dividend At Risk

Seeking Alpha
Tupperware: Bottom Falls Off, Dividend At Risk

Tupperware: Bottom Falls Off, Dividend At Risk



 About: Tupperware Brands Corporation (TUP)

Summary

Tupperware has been down 70% in the past year alone, and the company's challenges seem far from resolved.

Revenues continue to drop at a very fast pace, while I believe free cash flow will soon be insufficient to finance the dividend payments.

In my view, nothing other than a bold speculative play justifies buying TUP at current levels.

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Tupperware (TUP) reported 3Q19 earnings on October 30. And as much as I tried, I could not find one single piece of encouraging news to offer to shareholders, some of whom have been down 70% on this stock in the past 12 months alone.

Credit: Taste of Home

Bad quarter, worse outlook

The bearish story that led to the stock dropping about 35% in a single trading day started with the company's fourth consecutive all-around miss. The 20-cent EPS shortfall against expectations was by far the worst in the past five years at least, although a good chunk of it can be attributed to unexpected write-downs and tax issues.

Revenues of $418.1 million were once again heavily impacted by unfavorable currency movements. But even on an FX-adjusted basis, the top line still dropped by an astonishing 11% rate that was worse than last quarter's already concerning 7% dip. While Brazil, Mexico, Indonesia, and North America saw segment sales contract by a whopping 20% combined, the challenges extended across the globe - all major geographic regions outside Europe experienced a sharp decline in both sales and active sales force in 3Q19.

Source: DM Martins Research, using data from company's earnings report

Although adjusted SG&A dropped modestly YOY and gross margin remained relatively stable, the severe loss of operating leverage caused op margin to sink by nearly five percentage points (although I estimate that about two percentage points can be credited to the one-off reserve related to Fuller Mexico). Below the op line, the earnings pressure from a substantially higher effective tax rate in 3Q19 was partially offset by small amounts of share retirement and slightly reduced debt load generating lower interest expenses.

See P&L above reflecting my best effort at adjusting for items like goodwill impairment and gain from asset sale (but not corrected for currency effects).

Dividends: the elephant in the room

The bad news did not end with third quarter results, however. Tupperware's challenges appear far from being resolved, as CEO Tricia Stitzel seems to suggest in her earnings conference remarks:

The challenging trends we've been experiencing in Brazil, China and U.S. and Canada persisted. We're currently in the process of assessing critical aspects of our business, and are adjusting our plans for near-term action to improve flexibility in cash, contain costs and drive profitability. We recently engaged a global professional services firm that has a strong record of revitalizing iconic American brands that have experienced similar challenges to those facing Tupperware today.

As a consequence of the headwinds, guidance for the full year took yet another sizable haircut. Revenues ex-FX are now expected to drop 9% at the midpoint of the guidance range instead of 7%, while cash flow from operations net of investing (i.e. ex-capex and disposition of property) is now expected to land at $72.5 million at the midpoint.

As I stated in August, Tupperware's previous cash projections already made me question whether the company could sustain its dividend payments, unless the company "stabilized its fast-unwinding business in the next few quarters". The fundamentals seem to have deteriorated instead, and FCF will soon be insufficient to cover the dividend disbursements (see graph below).

I believe Tupperware would only be able to keep financing the dividend in the short term through asset disposition. Since the management team can probably think of better ways to allocate the company's dwindling cash reserves, I think it is a matter of time before Tupperware's board of directors voted to suspend the payments. Failure to do so could make a successful turnaround even less likely to materialize.

Source: DM Martins Research, using data from multiple company reports

On the stock

Looking for a cheap stock? I can't think of another iconic brand name whose shares have been so deeply discounted lately. TUP trades at a rock-bottom forward P/E of only 3.7x, while the dividend yield flirts with the 15% mark. At the same time, this stock seems to me like one of the most obvious value traps in the market.

Chart

Source: YCharts

As I have defended before, "investing in a struggling and highly-leveraged company that primarily sells plastic and acrylic containers at house parties does not sound like an appealing proposition to me". Add to the troubles an imminent dividend cut and one can arguably project shares digging deeper towards fresh lows.

I confidently take a pass on this stock, believing that nothing other than a bold speculative play justifies buying TUP at current levels.

I do not own TUP because I believe I can create superior risk-adjusted returns, in the long run, using a different strategy. To dig deeper into how I have built a risk-diversified portfolio designed and back-tested to generate market-like returns with lower risk, join my Storm-Resistant Growth group. Take advantage of the 14-day free trial, read all the content written to date and get immediate access to the community.

 

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