Hain Celestial (HAIN) Falls on Q1 Earnings Miss, Decline Y/Y

Zacks

The Hain Celestial Group, Inc. (HAIN Free Report) commenced fiscal 2019 on a soft note, wherein both the top and bottom lines not only fell short of the Zacks Consensus Estimate but also declined year over year. As a result, shares of this manufacturer, marketer, distributor and seller of organic and natural products lost roughly 14% during the trading session on Nov 8. This in turn led the year-to-date performance to slump almost 47% compared with the industry’s decline of 10%.

Q1 in Detail

The company posted first-quarter adjusted earnings of 9 cents a share that came below the Zacks Consensus Estimate of 13 cents, and also declined sharply from 20 cents recorded in the year-ago period. The downside can be attributed to lower net sales, higher interest, and other financing expenses and factors that affected gross margin.

Net sales fell 5% year over year to $560.8 million, missing the Zacks Consensus Estimate of $587 million owing to soft performance in the United States, United Kingdom and Rest of World. This was the fourth straight quarter that the company missed the consensus mark. On a constant currency basis, net sales dropped 4%. On adjusting for currency fluctuations, buyouts, divestitures and various other items like SKU rationalization, sales declined 2%.

Segment-wise, net sales at the United States segment dropped 8% year over year to $244 million mainly due to decrease registered across Pantry and Better-For-You Snacks platforms. This was partly mitigated by an increase in the Pure Personal Care platform despite production challenges. Sales were also impacted by the company’s decision to focus on the Top 500 SKUs rather than lower margin SKUs.

Net sales in the United Kingdom slid 2% to $218.6 million due to a decline of 4% in Hain Daniels net sales. This was partly offset by 4% and 8% sales growth witnessed in Tilda and Ella’s Kitchen, respectively.

Net sales for the Rest of the World segments declined 5% to $98.3 million. Net sales for Hain Celestial Canada and Hain Ventures decreased 5% and 18%, respectively, while net sales for Hain Celestial Europe were flat.

Costs & Margins

Adjusted gross margin contracted 250 basis points (bps) to 19% owing 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. This was somewhat made up by cost savings of $13 million from Project Terra.

SG&A expenses decreased nearly 4% to $82.3 million due to cost savings from Project Terra and lower performance-based compensation expense. However, the same increased 10 bps to 14.7% as a percentage of sales.

Adjusted operating income tanked 42% to $20.9 million, while adjusted operating margin contracted 240 bps to 3.7%. Adjusted EBITDA plunged 36% to $34.1 million, while adjusted EBITDA margin shrunk 300 basis points to 6.1%.

Other Financials

The company ended the quarter with cash and cash equivalents of $55.9 million, long-term debt (excluding current maturities) of nearly $693.4 million and shareholders’ equity of about $1,685.4 million. Net cash used in operating activities totaled $18.3 million, while capital expenditures incurred during the reported quarter were $22.5 million, thereby resulting in negative free cash flow of $40.8 million. Management projects capital expenditures to be in the range of $80-$100 million for fiscal 2019.

Outlook

Hain Celestial remains focused on its global strategic goals and continues to make marketing investments in key brands. Further, the company is gaining from additional savings and productivity from Project Terra. Markedly, Hain Celestial generated cost savings of nearly $16 million from Project Terra during the first quarter of fiscal 2019.

That being said, management aims to return its U.S. business to growth in fiscal 2019. Incidentally, the company expects net sales in fiscal 2019 to increase nearly 2-4% to $2.50-$2.56 billion. Management anticipates businesses in the United States and United Kingdom to be up low-to-mid-single digits, while for the Rest of World it is expected to increase in mid-to-high-single digits, on a constant currency basis.

Adjusted EBITDA is expected to rise in the range of about 7-17% to $275-$300 million. This includes the expected impact of Project Terra savings of nearly $90-$115 million, higher brand investments and COGS inflation of about 2% related to freight and commodity costs.

Effective tax rate for fiscal 2019 is anticipated in the range of 27-28%.

This Zacks Rank #3 (Hold) company envisions adjusted earnings per share in a band of $1.21-$1.38, reflecting a jump of roughly 4-19% from fiscal 2018.

Notably, sales and earnings growth are expected to be more weighted toward the second half of fiscal 2019, as the company anticipates reaping the benefits from its planned U.S. brand investments, distribution gains and efforts to optimize pricing. Further, savings and productivity gains from Project Terra are likely to speed up as the year progresses.

For the second quarter of fiscal 2019, the company projected net sales in the range of flat to up marginally and adjusted EBITDA between $55 million and $65 million.

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