Shares of The Hain Celestial Group Inc. tanked Thursday to an eight-year low after the organic and natural food giant posted second quarter adjusted earnings per share of $0.14, missing analysts’ estimates by $0.11, on revenue of $584.2 million, down 5 percent and also below expectations by $27 million.
The Lake Success, N.Y.-based company (NASDAQ: HAIN), with $2.5 billion in annual sales, contracts with more than 125 co-packers to produce its 55 brands including the Earth’s Best organic baby food, Celestial Seasonings tea, Walnut Acres Organic, Rudi’s Organic Bakery, and BluePrint cold-pressed juice brands, among others.
Newly installed CEO, Mark Schiller, who recently replaced Hain’s founder, Irwin Simon, as president and CEO, told analysts during a conference call that “our current performance is truly disappointing. We have issues that need fixing and we have decisions that need unwinding.”
For example, Schiller said Hain has about 40 brands which constitute a “long-tail of unprofitable and low velocity SKUs resulting from launching too many new line extensions that really didn’t add growth to the specific brands or categories. As a result they didn’t earn their space on the shelf and we lost considerable distribution and faced more distribution losses going forward. We’ve made some uneconomic investments and pricing decisions in pursuit of volume at any cost. We’ve also introduced complexity into our supply chain without understanding its full cost. As a result, we’ve lost profit in the United States and are lowering our outlook for fiscal 2019.”
Hain’s new FY2019 guidance comes in below analysts consensus with FY2019 sales pegged at $2.32 billion to $2.35 billion, down 4-5 percent compared to the prior year, versus the consensus of $2.45 billion. The company also expects adjusted EPS of 60-70 cents, down 40-48 percent versus the EPS consensus of $1.13.
Schiller said to help spur change in the company it is segmenting its portfolio of brands into four main categories: mainstream growth, sustainable contributors, incubation and profit maximization. Schiller said the company’s “core set of brands and categories” include tea, personal care, snacks, and yogurt, which he said are “high-velocity high-margin high-growth categories where we are well-positioned to succeed.”
“Going forward, we will address the long tail of unprofitable SKUs, we envision a smaller more focused company with higher margins and profits. But the tail, which is very long and it’s a lot of brands, that’s what’s going to shrink and that will impact the total top line growth of the company. That’s a fundamentally different approach for Hain,” Schiller said. “In the past, we added tremendous complexity and drain profit in pursuit of growth at any cost. Going forward, we will be smaller, less complex and more efficient resulting in higher margins and profits.”
Hain’s stock Thursday hit $14.45, the lowest since October 2011, amid trading of over 10 million shares, five times the average volume. The company’s shares closed at $16.15, down 9.2 percent and more than 50 percent below its 52-week high. Hain has a market cap of $1.7 billion.
The company said it had second quarter adjusted net income of $15 million compared to $33.6 million in the second quarter last year. Adjusted gross margin for the second quarter plunged 240 bps to 20.3 percent of sales, and adjusted EBITDA was $45 million compared to $68 million a year ago.
Hain Pure Protein to be sold in pieces
Hain’s CFO James Langrock said during the conference call on Thursday that the company expects to divest its Hain Pure Protein (HPP) organic and natural chicken and turkey division, which includes the Plainville Farms, Freebird and Empire Kosher brands, “over the next few months.”
However, rather than selling the business, which is now classified as a discontinued operation, as a single entity, Langrock said he expects the divestiture to occur via “multiple transactions.”
HPP’s second quarter net sales were $147.2 million, a decrease of 7 percent, while the segment’s operating loss in the first quarter was $59.6 million.
U.S. Q1 sales down 4%
Hain said second quarter net sales for its U.S. segment fell 4 percent during the first quarter to $259.2 million, and second quarter adjusted operating income of $13.4 million, down 57 percent, mainly due to the higher trade and marketing investments and increased freight and logistics costs.
Hain’s United Kingdom segment reported a 5 percent drop in net sales in the second quarter to $225.3 million over the prior year period, while the Rest of World segment’s net sales in the first quarter fell 8 percent to $99.7 million over the prior year period.