Helen Of Troy’s Combination With Drybar Creates a Trading Opportunity
Business Wire reported, “Helen of Troy Limited (NASDAQ: HELE), designer, developer and worldwide marketer of consumer brand-name housewares, health and home, and beauty products, [recently] announced that the company has entered into a definitive agreement to acquire Drybar Products LLC.”
The stock jumped on the news.
Business Wire continued, “This includes the Drybar trademark and other intellectual property assets associated with Drybar’s products, as well as certain related production assets and working capital. Drybar is a fast-growing, innovative, trendsetting prestige hair care and styling brand in the multi-billion-dollar beauty industry.
As part of the transaction, Helen of Troy will grant a worldwide license to Drybar Holdings LLC, the owner and long-time operator of Drybar blowout salons, to use the Drybar trademark in their continued operation of Drybar salons. The acquisition is expected to close by January 31, 2020, subject to customary closing conditions, including regulatory approvals.
[The company noted that] “We believe that the Drybar Products acquisition is an excellent fit with our strategic goal of investing in businesses that can accelerate profitable growth in categories where we can add value and leverage our scalable operating platform.
The total purchase consideration is expected to be approximately $255 million in cash, subject to certain customary closing adjustments. This implies a pre-synergy multiple of less than 13x estimated calendar year 2019 adjusted EBITDA, which compares favorably to Helen of Troy’s current Enterprise Value (EV)/TTM adjusted EBITDA multiple of approximately 16.4x.
Calendar year 2019 net sales revenue is expected to be $64 – $66 million.
The acquisition is expected to be immediately accretive to our consolidated sales growth rate, gross profit margin, adjusted EBITDA margin, adjusted diluted EPS, and cash flow from operations.
We expect it to be even more accretive to the Beauty segment on comparable operating measures. Due to our strong cash flow generation in the second half of the fiscal year, we expect to end fiscal 2020 with a post-acquisition pro forma debt/adjusted EBITDA ratio just slightly above the pre-acquisition debt/adjusted EBITDA ratio we reported at the end of the second quarter ended August 31, 2019.”
“We are delighted to announce that we have entered into an agreement to acquire Drybar Products, which will add a highly-respected and fast-growing brand to our Beauty business, and an 8th Leadership Brand to Helen of Troy’s portfolio,” said Helen of Troy CEO Julien Mininberg.
“Drybar products are winning in the prestige category with premium appliances, liquids, and accessories that resonate with a wealthier, on-trend consumer demographic for use at home and by stylists. The business has more than doubled in size since 2016 and continues to grow at a healthy double-digit rate across a wide array of retailers including ULTA, Sephora, Nordstrom’s, Macy’s, and of course, Drybar salons.”
Mr. Mininberg continued, “Strategically, we believe Drybar Products is an excellent fit with Helen of Troy. Drybar will complement our Revlon and HOT Tools products, allowing our brands to resonate with consumers and professionals across the good, better, and best segments.
We believe there is excellent upside potential for Drybar Products and we expect to capitalize on our expertise in beauty, appliances, new product development, sales, marketing, category development, and international.
Additionally, once we complete the necessary integration activities, we expect to add further value to the business and achieve meaningful synergies by leveraging Helen of Troy’s highly capable shared services through our global sourcing, distribution and back office capabilities.”
“We believe Helen of Troy’s license to Drybar Holdings will create a powerful business relationship that will strengthen the brand’s moat in the industry.
Helen of Troy plans to further improve and expand the products business, while Drybar Holdings plans to build out its salon footprint and maintain an exceptional consumer experience.
The salons, which feature professional stylists who demonstrate and recommend Drybar products thousands of times a day to a growing clientele, will exclusively use, promote, and sell our Drybar products globally. We are also very pleased to welcome the Drybar products team to the Helen of Troy family at the closing of the acquisition, including its leader, John Heffner.”
HELE has been in an up trend and this news could boost the stock further.
A Trade for Short Term Bulls
As with the ownership of any stock, buying HELE could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for HELE
Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For HELE, the January 17 options allow a trader to gain exposure to the stock.
A January 17 $180 call option can be bought for about $6.70 and the January 17 $185 call could be sold for about $4.15. This trade would cost $2.55 to open, or $255 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $255.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in HELE the maximum gain is $2.45 ($185 – $180= $5; $5 – $2.55 = $2.45). This represents $245 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $255 to open this trade.
That is a potential gain of about 96% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.