As consumer spending grinds to a complete halt amid the worst economic slowdown since the Great Depression, it is certainly surprising to see some companies dependent on discretionary spending that are actually holding up fairly well in this brutal market.

Helen of Troy (HELE) is one such consumer discretionary company. The company designs, produces and markets brand-name personal-care electrical products, including hair dryers, hot-air brushes and women's shavers. It also produces and markets nonelectric items such as massage cushions, footbaths and various kitchen items.

All of Helen of Troy's products are for services that people can either live without, use less frequently or find cheaper alternatives to. Spas and salons bear a disproportionate burden than normal consumer services because they epitomize luxury and extravagance. These are usually the first items cut from a tightening household budget. High-end retailers such as Jones Apparel (JNY) and Liz Claiborne (LIZ), both of which are down 80% or so on the year, give investors a nasty taste of what happens when the consuming public turns to discount retailers, such as Wal-Mart (WMT) and Family Dollar (FDO). Bare Essentials (BARE) also fits the category of a once-high-flying discretionary stock that has seen a huge drop off in sales given the economic recession.

Helen of Troy operates in a bunch of different segments, selling directly to the consumer and to other licensers of its product. It sells directly to various spas and salons products from brands such as Dr. Scholl's, Health O Meter, Revlon Spa, SunBeam, OXO and Hot Spa. Helen of Troy gets 55% of sales from discretionary personal appliances such as curling irons and foot massagers and 45% from hair products.

By all accounts, these brands are suffering from the cyclical consumer downturn that the economy is facing, and shares of Helen of Troy are likely overvalued here.

Net sales for Helen of Troy went from $475 million in 2004 to $653 million in 2008, an increase of 37%, or just under 10% per year for four years -- hardly impressive for a company that will likely experience a notable decline in revenues for 2009.

Interestingly enough, net earnings for Helen of Troy went from $60.5 million dollars in 2004 to just $61.5 million dollars in 2008, a 1.6% increase over four years, or an increase of about 0.4% in net earnings each year. Likewise, diluted EPS actually declined, going from $1.94 in 2004 to $1.93 in 2008.

JPMorgan just downgrade shares of Helen of Troy on Monday, citing a deteriorating economy that is likely to have a negative impact on Helen of Troy’s hair-appliance business, which represents 50% or so of Helen of Troy’s revenue. The JPMorgan analyst also said that Helen of Troy’s OXO household brand, which sells various household products and represents about 25% of the company’s sales mix, will likely suffer due to the downturn in the economy. That’s 75% of Helen of Troy’s business expected to suffer.

JPMorgan also cited Helen of Troy’s valuation of a forward P/E of 7.78, assuming you believe current estimates, and an enterprise value/EBITDA of 7.831, which are substantially higher than the industry average.

Furthermore, it is likely that Helen of Troy will have to take additional sizeable inventory write-downs largely on the value of trademark agreements and sales orders.

Given analysts' elevated estimates of 76 cents for this coming quarter, inventory write-downs and a cyclical downturn in consumer spending and psychology, shares of Helen of Troy are attractive as an earnings short trade ahead of the quarter. It announces earnings on Jan. 8.

Posted no Jan. 7, 2009