Shares of Hain Celestial (HAIN - Free Report) have underperformed the industry in the past six months. Evidently, the stock plunged roughly 21.9% in the said time frame, significantly underperforming the industry’s decline of 5%. This may be attributed to dismal third-quarter fiscal 2018 results and muted guidance. The company continues to witness dismal sales in the United States.
Nonetheless, in order to improve efficiency and simplify brand portfolio, the company decided to divest Hain Pure Protein business, which is likely to close in the first half of fiscal 2019. Moreover, with an extensive portfolio of brands, Hain Celestial offers one of the strongest growth profiles. Acquisitions have been a key part of the company’s strategy to gain market share.
What’s Pulling the Stock Down?
With gradual increase in the number of companies expanding their presence in the natural & organic food space, competition is likely to be stiff and will have an impact on the company’s performance. Although the top and the bottom line improved year over year, they missed estimates for the second quarter in a row in the third quarter.
The company also struggled with its operating margin that shrunk 110 basis points to 8.9%. We note that SG&A expenses for the quarter rose 13%, whereas a percent of sales for the same increased 50 basis points to 13.4%.
Well, this was not enough as the company also lowered its earnings per share projection keeping its revenue view intact. Management expects earnings in the range of $1.11-$1.18 down from its earlier projection of $1.39-$1.50 (including 8-9 cents of gain from the latest tax reform), owing to continued higher investment in marketing and brand awareness, primarily in the United States, along with increased freight and certain commodity price headwinds.
Efforts to Counter These Hurdles
Hain Celestial has been actively pursuing strategic acquisitions to diversify its base and is now planning to expand in India, Middle East and China. A healthy balance sheet enables it to target strategic acquisition opportunities, which is likely to result in incremental sales along with providing the company with a strong foothold in the packaged food and grocery market. Hain Celestial acquired Clarks UK Ltd. (The Natural Sweeteners Company), which is the leading maple syrup brand and a natural sweetener brand in the United Kingdom. Its other buyouts include The Better Bean Company, The Yorkshire Provender Limited, Tilda Limited, Rudi's Organic Bakery, Hartley's, Gale's Robertson's, Frank Cooper's, Ella's Kitchen Group Limited and Sun-Pat.
Apart from this, the company is making efforts to improve its top line. Hain Celestial initiated a strategic review under Project Terra in fiscal 2016 and expects to generate worldwide cost savings worth $350 million through fiscal 2020 (comprising annual productivity). Out of $100 million targeted for the fiscal, the company has attained cost savings of $35 million in the first half of fiscal 2018 and $25 million (including Hain Pure Protein) in the third quarter.
The company intends to reinvest the additional savings through brand development and household penetration. Prior to this, the company announced plans to create five strategic platforms in its U.S. segment in order to augment sales and margin growth. Additionally, Hain Celestial created Cultivate Ventures or “Cultivate”, which is a unit focused on three main ideas — investing in the company’s small yet high potential brands, making small acquisitions, and investing in products, concepts and technology committed to health and wellness. Also, its recent plans to divest its protein division will help simplify brand portfolio and boost efficiency.
All said, we hope that the aforementioned initiatives will help this Zacks Rank #3 (Hold) stock return to growth trajectory.
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