Description

Edgewell Personal Care (EPC) - 68% of EBITDA is Schick shaving. 18% is sunscreen, 15% is women’s hygiene. Overall category growth is < GDP. 1.5% nominal growth. Gillette has ~80% share of the brick and mortar market in the US, Schick has 15% share. Schick is a second tier brand but the price points are not much less than Gillette. 58% of sales are in the US.

DSC and Harry’s will cause a material decline in Schick revenues and EBITDA - Price pressure. Will lose volume and have to increase promotional spend. Bulls think volume declines reflect a fashion shift towards beards… > 35% of the market will eventually go direct to consumer (DTC). The amount will depend on quality and how the incumbents react. this is not a millennial fad, it is across all ages and incomes, the quality is good (analogous to Casper in mattresses). Perceived quality is surprisingly very high, even among Gillette users. Half of existing Gillette users think Gillette is too expensive. Dollar Shave Club (DSC) and Harry’s have > 15% volume share and HSD $ share. They price at 50% below the incumbents. DSC and Harry’s are growing 100% annually. NPD data for incumbents is down HSD.

 It is very hard to respond. 1) they cannot cut price, the price cut you need to make would wipe out more than half of EPS. 2) you cannot innovate. Razors are already quite good and no one cares. 3) They should build low end fighter brands along the DTC model. However, they are not able to do this well. They do not know how to market in social media, tell a story and engage directly with consumers. They need to acquire this skill. Other barriers: you cannot get best talent to move from SF/NY to the Midwest. They do not pay enough. But the main problem is they have already lost the first mover advantage. DSC has > 4MM subs in the US and Harry’s has > 1M. Within one year they will have more than 10MM. 4) you cannot offset the decline by going DTC at high retail prices. Gillette is trying this and it is a total failure. My guess is you can convert a MSD % of your customers over to this channel. Given it is higher margin, it will boost EPS by 5% over time. That is a manageable risk to the short thesis. 5) you cannot go DTC at a low price with your existing brands. The retail channel will not let you.  6) you cannot follow DSC and try and get men to shave more frequently and sell them more blades bc that contradicts their message of quality (long lasting blades).

EPC deserves a takeout premium and will likely get acquired, but at a lower price – Bulls expect HSD synergies and a multiple reflecting a scarce strategic asset. I think EPC gets taken out at a $10 premium to fair value, which is well below the current share price. I think there is no precedent for HSD synergies, precedent deals that claim this amount are dishonest, acquirers end up reinvesting a lot of the supposed cost savings and margins rarely rise more than MSD. The implied EBITDA margins in the case of HSD synergies is simply too high; those margins are only seen in Gillette, Oral B and Colgate brands. all three brands are dominant, have strong pricing power and no competition (Gillette should see margins decline).

Their fem care business will come under the same pressure as Schick (11% of EBITDA) – A company named Lola is followed the same game plan. If they do not succeed, someone will. DSC studied the category and thinks it is viable, however DSC wants to focus on the much larger men’s market. This will take time to play out, but acquirers should be aware of the risks.

 Valuation –  EPC should de-rate once this “Yield play” is recognized as a risky investment-  Trades at 21x FWD EPS, 24x TTM EPS and 12.5x FWD EBITDA.  I expect EBITDA and EPS to decline for several years (absent a large deal). They are 2.3x levered. i think the stock is worth $53.

Catalyst

Now that Unilever acquired DSC, competition will accelerate - Unilever acquired DSC for $1bn this summer. They want to increase growth from 100% to 300%. They are now offering first month free, which my survey suggested was the #1 way to win customers over. They are going international in 2017. The best way to acquire new customers is to offer a free one month trial. Both entrants rolled this out in September. Harry's launched inside TGT in August and has done very well.