A month has gone by since the last earnings report for Hain Celestial (HAIN). Shares have lost about 8.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Hain Celestial due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Hain Celestial Q3 Earnings & Sales Beat
The Hain Celestial Group, Inc. (HAIN) broke its negative earnings and sales surprise trend in third-quarter fiscal 2019 results. However, the better-than-expected performance failed to placate investors, who were let down by a year-over-year decline in top and bottom lines along with management’s retained unimpressive view for fiscal 2019.
Quarter in Detail
The company posted adjusted earnings of 21 cents a share that beat the Zacks Consensus Estimate by a penny, though it plunged 43.2% year over year. The downside can be attributed to soft sales and margins along with a higher tax rate.
Net sales dropped 5% year over year to $599.8 million, while it surpassed the Zacks Consensus Estimate of $594 million. The top line was hurt by sluggish performance in the United States, the United Kingdom and Rest of World. On a constant-currency basis, net sales dropped 2%. On adjusting for currency fluctuations, buyouts, divestitures and various other items like SKU rationalization, net sales came in line with the year-ago period’s figure.
Net sales at the United States segment dropped 5% year over year to $266.4 million. On adjusting for currency fluctuations, buyouts, divestitures and various other items like SKU rationalization, net sales dipped 2%.
Net sales in the United Kingdom slid 5% to $227.2 million, while the same rose 3% on adjusting for the aforementioned items. This was backed by sales growth witnessed in Tilda and Ella's Kitchen.
Net sales for the Rest of the World segment descended 6% to $106.1 million and climbed 1% after the abovementioned adjustments.
Net sales for Hain Celestial Canada, Hain Celestial Europe and Hain Ventures decreased 6%, 4% and 16%, respectively. On adjusting for currency fluctuations, buyouts, divestitures and various other items like SKU rationalization, net sales at Hain Celestial Canada and Hain Celestial Europe rose 2% and 4%, respectively, whereas Hain Ventures net sales declined 14%.
Adjusted gross margin contracted 140 basis points (bps) to 21.6%, owing to increased trade and supply-chain expenses in the United States, and elevated commodity expenses. This was somewhat made up by savings from Project Terra.
Adjusted operating income tanked 30.5% to $38.9 million, while adjusted operating margin contracted 240 bps to 6.5%. Adjusted EBITDA decreased 24.4% to $55.5 million, while adjusted EBITDA margin shrunk 230 bps to 9.3%.
The company ended the quarter with cash and cash equivalents of $27.6 million, long-term debt (excluding current portion) of nearly $729.2 million and total shareholders’ equity of $1,549.8 million. Net cash used in operating activities from continuing operations totaled $13.1 million, while capital expenditure incurred during the three months ended Mar 31, 2019, were around $14.4 million.
In fiscal 2019, cash flow from operations is anticipated to come at the lower end of the $75-$90 million range. Further, capital expenditures are expected between $70 million and $80 million.
Other Developments & Outlook
Hain Celestial concluded the sale of a significant chunk of assets related to the Plainville Farms business on Feb 15, 2019. Moreover, a day prior to the earnings announcement, the company inked a deal to sell its entire equity stake in Hain Pure Protein Corporation, which incorporates the FreeBird and Empire Kosher businesses.
Hain Celestial is well on track with Project Terra, which is aimed at cutting costs and complexity alongside driving sales. The company generated savings of nearly $27 million from this program in the third quarter and $62 million on a year-to-date basis. Management expects total savings from this program to be roughly $90 million in fiscal 2019.
Well, management is pleased with the third-quarter performance, which reflected sequential improvements in many core business areas. Further, the company is progressing well with its transformation strategy for the United States, which was highlighted at the company’s Investor Day. The strategy is aimed at simplifying portfolio, solidifying key capacities, enhancing margins, reviving top-line growth, and improving cash flows and ROIC.
While Hain Celestial’s efforts to reduce uneconomic activities and curtail supply-chain expenses are likely to enhance gross and EBITDA margins, such activities are expected to show on the top line through the rest of this fiscal and a significant part of the next one. The company is surely on track with its transformation efforts but has a long way to go to see a substantial turnaround.
All said, Hain Celestial reiterated its outlook for fiscal 2019. The company expects net sales from continuing operations in fiscal 2019 to drop 4-6% to $2.32-$2.35 billion. Adjusted EBITDA from continuing operations is expected to decline 22-28% to $185-$200 million. Finally, Hain Celestial anticipates adjusted earnings per share from continuing operations to be 60-70 cents, reflecting a decline of 40-48% from the figure reported in fiscal 2018.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months.
Currently, Hain Celestial has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Hain Celestial has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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