Hain Celestial Weathers Storm

Yesterday after the close, The Hain Celestial Group, Inc. (HAIN - Analyst Report) reported results for the third quarter of fiscal 2009 ending March 31, 2009. Despite the very tough quarter being the second consecutive below expectations quarter, we maintain our Buy rating on the stock.

Hain Celestial has weathered the perfect storm, and not only survived but prospered. Despite multiple headwinds, sales increased. And on an operating basis, the company was profitable.

Adjusted operating quarterly earnings were $0.31 per diluted share, a 14% decline from $0.36 reported in the year-ago quarter. Earnings were $0.04 below expectations. GAAP earnings were a loss of $1.01 per diluted share, which include an after-tax non-cash impairment charge of $48.4 million against goodwill and intangible assets related to the European and Hain Pure Protein's (HPP) units.

Net sales increased 1.2% year-over-year to $267.7 million versus $264.6 million recorded in the prior-year period. The top-line was negatively impacted by currency adjustments ($12.6 million), retailer de-stocking ($10 million), peanut-related product recalls ($2 million), and a movement of advertising spending to direct-to-consumer promotional (coupon) spending.

AC Nielson reported that industry coupon redemptions increased 17% during the quarter and Hain's level was above the industry average. GAAP accounts for coupon redemption expense by reducing the top-line (net sales).

Some notable brands that helped the company grow the top-line include Earth's Best, Rice Dream, Imagine Soup, Avalon Organics, and JASON. Sales of Alba and Terra brands were disappointing.

Another headwind was the planned movement of turkey production from the Plainville facility to Oxford. The four-month closure of the Plainville facility in order to convert it to Kosher-compliant production cost the company $0.04 in earnings. With the conversion of turkey production from de-emphasizing commodity turkey (average selling price of $0.80 per pound) to focusing on antibiotic free turkey ($1.77 per pound), the company is poised to be more profitable in the future.

Despite the multiple major headwinds in the quarter, the overall adjusted gross margin (adjusted for the lower margin HPP joint venture) increased 126 basis points (bps) to 28.3% versus 27.2% in the comparable prior-year period.

Concurrent with the earnings release, management again reduced sales and earnings guidance for fiscal 2009. Earnings are now expected to be in the range of $1.25 to $1.30 per diluted share compared to prior guidance of $1.38 to $1.42. Similar to fiscal year 2008, management expects to incur $0.10 per share in stock compensation expense which is not included in guidance. Net sales guidance was also lowered to the $1.162 billion to $1.170 billion range versus prior guidance of $1.175 billion to $1.200 billion.