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Hain Celestial's (HAIN) Q2 Earnings Decline Y/Y, View Slashed

Zacks Equity Research

The Hain Celestial Group, Inc. HAIN disappointed investors with second-quarter fiscal 2019 results, wherein both top and bottom lines declined year over year and continued with the negative surprise trend. Moreover, management slashed its top and bottom-line views for fiscal 2019, which was an additional dent on investors’ sentiments. Notably, shares of this manufacturer, marketer, distributor and seller of organic and natural products lost 9.2% during the trading session on Feb 7. In fact, this Zacks Rank #5 (Strong Sell) stock has plunged 43.3% in the past six months, wider than the industry’s decline of 8.5%.

Markedly, Hain Celestial now envisions adjusted earnings per share from continuing operations to be 60-70 cents, reflecting a decline of 40-48% from fiscal 2018. Also, the updated guidance is way below the current Zacks Consensus Estimate of $1.10.

Q2 in Detail

The company posted adjusted earnings of 14 cents a share that came below the Zacks Consensus Estimate of 26 cents, and also declined sharply from 32 cents recorded in the year-ago period. The downside can be attributed to lower net sales, and higher interest and other financing expenses and factors that affected gross margin.

The Hain Celestial Group, Inc. Price, Consensus and EPS Surprise



The Hain Celestial Group, Inc. Price, Consensus and EPS Surprise | The Hain Celestial Group, Inc. Quote

Net sales dropped 5% year over year to $584.2 million, missing the Zacks Consensus Estimate of $612 million, owing to soft performance in the United States, United Kingdom and Rest of World. On a constant-currency basis, net sales dropped 4%. On adjusting for currency fluctuations, buyouts, divestitures and various other items like SKU rationalization, sales dipped 1%.

Segment-wise, net sales at the United States segment dropped 4% year over year to $259.2 million, mainly due to decrease registered across Pantry and Better-For-You Baby products. This was partly mitigated by an increase in the Better-For-You Snacks category. Sales were also negatively impacted by the company’s decision to shift focus away from various lower margin SKUs.

Net sales in the United Kingdom slid 5% to $225.3 million, due to a decline of 4% in Hain Daniels net sales. This was partly offset by sales growth witnessed in Tilda, whereas sales at Ella's Kitchen remained flat year over year.

Net sales for the Rest of the World segment tumbled 8% to $99.7 million. Net sales for Hain Celestial Canada and Hain Ventures decreased 12% and 17%, respectively, while net sales for Hain Celestial Europe were flat year over year.

Costs & Margins

Adjusted gross margin contracted 240 basis points (bps) to 20.3%, owing to increased investments related to trade and promotions along with escalated freight and commodity expenses in the United States.

SG&A expenses decreased 1.2% to $85.4 million, due to cost savings from Project Terra, which were somewhat offset by marketing investments in the company’s international operations. However, the same increased about 60 bps to 14.6% as percentage of sales.

Adjusted operating income tanked 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%.

Other Financials

The company ended the quarter with cash and cash equivalents of $38.2 million, long-term debt (excluding current portion) of nearly $692.1 million and total shareholders’ equity of $1,590.9 million. Net cash used in operating activities from continuing operations totaled $14.5 million, while capital expenditure incurred during the three months ended Dec 31, 2018, were close to $19 million, thereby resulting in negative free cash flow of $40.8 million. Management projects capital expenditure of $80-$100 million for fiscal 2019.

Outlook

While management is skeptical about its near-term performance, the company is seeing some sequential improvements and working toward reverting to growth in the United States. Further, the company is on track to simplify its business and allocate its resources toward areas with higher growth potential. Management expects to see improvements in the second half of fiscal 2019 when compared with the first half, on the back of its Project Terra savings plan.

Hain Celestial is well on track with Project Terra, which is aimed at cutting costs and complexity, alongside aiding sales growth. The company generated savings of nearly $21 million from this program in the second quarter. However, management now expects total savings for fiscal 2019 to be at the lower end of its previously guided range of $90-$115 million. This is because some savings are taking time to be generated, owing to the existing complexities in the company’s U.S. business. Consequently, management slashed its guidance for fiscal 2019.

Hain Celestial now expects net sales from continuing operations in fiscal 2019 to decline 4-6% to $2.32-$2.35 billion. Earlier, management projected the same to increase nearly 2-4% to $2.50-$2.56 billion.

Adjusted EBITDA from continuing operations is now expected to tumble 22-28% to $185-$200 million. Management earlier projected the metric to rise about 7-17% to $275-$300 million.

Hain Celestial now anticipates adjusted earnings per share from continuing operations to be 60-70 cents, reflecting a decline of 40-48% from fiscal 2018. On the contrary, the company earlier predicted the bottom line to be $1.21-$1.38 per share, reflecting a jump of roughly 4-19% from fiscal 2018.

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