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Hain Celestial (HAIN) Down on Weak FY19 Outlook & Soft Margin

Zacks Equity Research

Shares of Hain Celestial Group, Inc. HAIN have slid and underperformed the industry in the past six months. This Zacks Rank #4 (Sell) stock slumped more than 14.5% in the said period, underperforming the industry’s decline of 12.4%.



The bearish run can be attributed to second straight negative sales and earnings surprises in second-quarter fiscal 2019, wherein both the top and bottom lines fell year over year. Following the results, management slashed its fiscal 2019 view. We note that the company witnessed sluggish sales performance across the United States, the United Kingdom and Rest of the World along with soft margins during the quarter.

Let’s Delve Deep

Hain Celestial’s net sales fell 5% year over year, owing to soft performance in all three regions during second-quarter fiscal 2019. The company now expects net sales from continuing operations in fiscal 2019 to decline 4-6% to $2.32-$2.35 billion.

Further, the company witnessed significant decline in the bottom line, owing to lower net sales, and higher interest and other financing expenses along with factors affecting gross margin. In fact, adjusted gross margin contracted 240 basis points and 250 basis points in the second and first quarters of fiscal 2019, due to increased investments related to trade and promotions along with escalated freight and commodity expenses in the United States.

Moreover, adjusted operating income slumped close to 40% to $29.9 million, while adjusted operating margin contracted 290 bps to 5.1%. Adjusted EBITDA plunged 33.7% to $44.9 million, while adjusted EBITDA margin shrunk roughly 330 bps to 7.7%. Going ahead, adjusted EBITDA from continuing operations is expected to tumble 22-28% to $185-$200 million in fiscal 2019.

Given this declining trend in margins, Hain Celestial now anticipates fiscal 2019 adjusted earnings per share from continuing operations to be 60-70 cents, reflecting a decline of 40-48% from fiscal 2018.

Bottom Line

Despite such downsides, we expect the company to get some respite from Project Terra. The plan generated cost savings of $21 million during the first quarter of fiscal 2019. Management now expects total savings for fiscal 2019 to be at the lower end of its previously-guided range of $90-$115 million. Additionally, the company is on track to simplify its business, evident from the gradual divestments of poultry operations (Hain Pure Protein) and allocation of its resources toward areas with higher growth potential such as core packaged-foods business. Management expects to see improvements in the second half of fiscal 2019 compared with the first half, on the back of Project Terra savings plan.

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