The Hain Celestial Group, Inc. (HAIN - Free Report) is concerned about dismal sales surprise history, stemming from softness in its U.S. segment. Also, higher trade and promotional investments in the United States along with escalated freight and commodity costs have been a hurdle to profitability.
Owing to such headwinds, shares of this Zacks Rank #3 (Hold) company slumped 47.5% in the past six months compared with the industry’s decline of 24.2%. Also, the company has lagged the broader Consumer Staples sector that fell 11.1% in the said time period.
Factors Affecting Hain Celestial’s Performance
Hain Celestial’s negative sales surprise history is a major concern. Notably, the company marked its fourth consecutive quarter of top-line miss in first-quarter fiscal 2019. During the quarter, net sales fell 5% year over year, owing to continued softness in the United States along with weakness in the United Kingdom and Rest of World.
Net sales at the United States dropped 8% year over year in the quarter, following 6% and 3% drops in the fourth and third quarters of fiscal 2018, respectively. During the first quarter, U.S. sales were hurt by a decrease registered across Pantry and Better-For-You Snacks platforms along with SKU rationalization efforts.
Further, the company is witnessing weak margins since the past two quarters. Hain Celestial’s adjusted gross margin contracted 250 basis points (bps) in the first quarter, following a decline of 290 bps in the preceding quarter. This was accountable to increased investments related to trade and promotions in the United States, escalated freight and commodity expenses, production issues at Personal Care platform and supply-chain disruption in the United States.
To top this, rising SG&A expenses have also been weighing on the company’s profitability. In fact, SG&A costs increased 10 bps to 14.7% as a percentage of sales in the first quarter. As a result, adjusted EBITDA plunged 36% to $34.1 million, while adjusted EBITDA margin shrunk 300 bps to 6.1%. In fiscal 2019, management expects the adjusted EBITDA to be impacted by higher brand investments (mainly in the United States) and COGS inflation of about 2% related to freight and commodity costs.
Efforts to Counter Challenges
Hain Celestial is on track with its savings boosting program — Project Terra. We note that the company generated cost savings of nearly $63 million from Project Terra during fiscal 2018. During the first quarter of fiscal 2019, the company generated cost savings of $60 million from this initiative.
Going forward, the company expects savings of roughly $90-$115 million in fiscal 2019. The company is also divesting its Hain Pure Protein business (which is likely to close by the third quarter of fiscal 2019) to boost efficiency and simplify brand portfolio.
Apart from this, the company is focusing on expanding globally, with plans to expand distribution network in China and capture the Indian market. In this regard, one of its wholly-owned subsidiaries acquired Clarks UK Ltd., the leading maple syrup and a natural sweetener brand in the United Kingdom.
Other notable buyouts include Tilda Limited, a renowned Basmati rice producing company, and Rudi's Organic Bakery, one of the leading organic and gluten-free products company. Hain Celestial also acquired some leading packaged grocery brands — Hartley's, Gale's Robertson's, Frank Cooper's and Sun-Pat — from Premier Foods plc. The company also acquired Ella's Kitchen Group Limited that offers organic baby food products under approximately 80 brands.
All said, we expect Hain Celestial’s well-spun efforts to boost revenues and savings will provide cushion to battle the aforementioned hurdles and aid the stock’s revival.
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