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Project Terra to Aid Hain Celestial, Drab FY19 View Hurts

Zacks Equity Research

The Hain Celestial Group, Inc. HAIN is progressing well with its Project Terra, which is likely to improve productivity and facilitate cost reductions, thereby strengthening the company’s financial position.

The project was announced in fiscal 2016, with the intention of generating worldwide cost savings worth $350 million through fiscal 2020 (comprising annual productivity). In doing so, the company intends to optimize plants, co-packers and procurement along with rationalizing product portfolio.

Notably, out of $100 million targeted for fiscal 2018, the company has already attained cost savings of $63 million (including Hain Pure Protein).  Going ahead, management expects total savings for fiscal 2019 to be at the lower end of its previously guided range of $90-$115 million. The company plans to reinvest such savings in brand development and household penetration.

Apart from this, Hain Celestial has actively pursued strategic acquisitions to gain market share and expand customer base. Further, it plans to expand in regions such as India, Middle East and China. In this regard, one of its wholly-owned subsidiaries, acquired Clarks UK Ltd., the leading maple syrup and a natural sweetener brand in the United Kingdom. Other notable buyouts include Tilda Limited, a renowned name in Basmati rice, and Rudi's Organic Bakery, one of the leading organic and gluten-free company. Hain Celestial also acquired some leading packaged grocery brands – Hartley's, Gale's Robertson's, Frank Cooper's and Sun-Pat – from Premier Foods plc. The company also acquired Ella's Kitchen Group Limited that offers organic baby food products.

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. We expect that such well-chalked efforts will yield favorably in the near term.

Drab FY19 View & Soft Margins Act as Headwinds

On the flip side, Hain Celestial’s net sales fell 5% year over year during second-quarter fiscal 2019. This was due to soft performance in the United States, the United Kingdom and Rest of World, wherein sales fell 4%, 5% and 8%, respectively. This combined with decline in gross margin and higher interest expenses weighed on the bottom-line.

Notably, the company’s gross margin has been sluggish lately. In fact, adjusted gross margin contracted 240 basis points (bps) and 250 bps in the second and the 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.

Owing to such deterrents and the existing complexities in the company’s U.S. business, management lowered its fiscal 2019 projection. The company now expects net sales from continuing operations in fiscal 2019 to decline 4-6% year on year compared with the earlier view of increase of 2-4%. Further, management anticipates fiscal 2019 adjusted earnings per share from continuing operations to be 60-70 cents, reflecting a decline of 40-48% from fiscal 2018. Earlier, the company had predicted the bottom line to be $1.21-$1.38 per share. Such downsides have led the company’s shares to plunge 13.6% in the past six months, underperforming the industry’s decline of 2.9%.

Nevertheless, we expect this Zacks Rank #3 (Hold) company’s saving plans to offset the aforementioned hurdles. In fact, 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. Also, the company’s endeavors to boost market share are encouraging. These efforts are likely to lift the company’s shares in the forthcoming periods.

Looking for Better Food Stocks? Check These

Medifast MED has long-term earnings growth rate of 20% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Associated British food PLC ASBFY has long-term earnings growth rate of 6% and a Zacks Rank #1.

Lamb Weston Holdings LW has long-term growth rate of 11.8% and a Zacks Rank #2 (Buy).

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