Recall Costs Trip Chattem As It Navigates Economic Downturn, Lawsuits
This article was originally published in The Tan Sheet
Executive Summary
Chattem is making moves to overcome slumping consumer confidence and rising operating costs, but losses from a voluntary product recall kept its revenue growth relatively flat in the firm's most recent quarter
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Chattem is making moves to overcome slumping consumer confidence and rising operating costs, but losses from a voluntary product recall kept its revenue growth relatively flat in the firm's most recent quarter. In a July 10 earnings call, the consumer health care products firm's executives also reflected on the effects of tightening economic conditions and the current legal challenges it faces. In a same-day earnings statement, the company says total revenues for its fiscal 2008 second quarter grew 3 percent over the same period last year to $116.7 million. The firm's net income for the March-May period increased 39 percent to $20.7 million. Revenues for the quarter would have increased 6 percent if not for the voluntary recall of the company's Icy Hot Heat Therapy disposable pain patch, according to Chattanooga, Tenn.-based Chattem. The firm announced the recall in February after some consumers reported skin irritation and burns associated with use of the product (1 (Also see "Chattem To Consider New Icy Hot Heat Therapy Product In Wake Of Recall" - Pink Sheet, 18 Feb, 2008.), p. 5). In the earnings call, President and Chief Operating Officer Robert Bosworth cited AC Nielsen data on the strong sales of Chattem's "big six" brands, led by the "tremendous momentum" of Gold Bond Medicated Body Lotion. Gold Bond sales are up 63 percent in the four weeks preceding the earnings statement compared to the same period in 2007. However, Chairman and CEO Zan Guerry admitted to flat growth for Selsun Blue dandruff shampoos, with weak sales for Selsun Salon negating the strong performance of the Naturals line. Guerry said overall sales for the firm's product launches in 2008 have been "upside of what we would have anticipated," but Icy Hot PM Lotion has thus far been "less of a success than we hoped." Bosworth said Chattem is responding to increased production and transportation costs, especially for petroleum. The company's moves include innovations to reduce spending on packaging, consolidation of freight to trim transportation costs and negotiations with suppliers on their prices. A 5.4 percent retail price increase on some products, which Chattem instituted in April, has also helped buffer the impact of an economic downturn, as consumers have been generally receptive to the change, Bosworth said. Chattem will evaluate additional increases, weighing factors including the risk of exceeding retail price points acceptable to consumers as well as competitors' pricing activity, he added. Chattem's earnings per share for the quarter were $1.06, a 38 percent increase. Additionally, the company said its strong cash position allowed it to repurchase 183,681 shares during the quarter. Looking forward, Guerry was tight-lipped on details of Chattem's 2009 brand extensions, but did say there will be three new Gold Bond products, including two lotions, and ACT mouthwashes could prove the largest of the new product introductions. Chattem acquired ACT from Johnson & Johnson in 2006 and has grown its sales through expanded marketing (2 (Also see "Chattem Plans ACT, Gold Bond, Icy Hot Line Extensions In 2009" - Pink Sheet, 23 Jun, 2008.), p. 6). Asked about Chattem's potential interest in acquiring Procter & Gamble's ThermaCare line of pain-relief wraps, Guerry declined to comment. But he said there is a "fairly big cloud" over the segment currently as FDA tightens regulation of OTC heat-generating pain-relief devices due to the possibility of injury to users. Injuries from Chattem's Icy Hot products are alleged in two lawsuits recently filed against the company, Bosworth said. Chattem also faces 17 complaints recently filed by plaintiffs claiming they suffered pulmonary arterial hypertension in connection with the ephedrine-containing formulation of Dexatrim , which Chattem discontinued in 2002. Bosworth said he did not expect the litigation to have a significant effect on ongoing business. Dietary supplements containing any amount of ephedrine alkaloids were banned by FDA in 2004. An appellate court upheld the agency's rulemaking in a decision that the Supreme Court in May 2007 declined to consider (3 (Also see "Supreme Court Refuses Ephedra Case, Battle Against Risk-Benefit Continues" - Pink Sheet, 21 May, 2007.), p. 3). - Dan Schiff ([email protected]) |