EUR 850.00 For Business Accounts Only

Morningstar | Sluggish End to Hain's Fiscal 2018 Unsurprising; Shares Somewhat Attractive Despite Turnaround Risk

We do not plan to materially alter our $34 fair value estimate for no-moat Hain Celestial after the company reported fiscal 2018 results. While we still believe the company's turnaround will be volatile, with multifaceted execution risk that should persist even after a new management team is installed, we see the shares as attractive for patient investors. We continue to expect mid-single-digit long-term sales growth and adjusted operating margin expansion toward the low teens over the next 10 years (from 8% in fiscal 2018) as Hain cuts costs and refocuses on its most lucrative brands and items.

For the year, Hain’s sales rose 5% to $2.46 billion on a 7.6% adjusted operating margin (near our $2.47 billion and 7.4% respective expectations, excluding Hain Pure Protein, which is slated for divestiture in the first half of fiscal 2019). Management provided fiscal 2019 guidance for $2.50 billion-$2.56 billion in sales, $275 million-$300 million in adjusted EBITDA, and $1.21-$1.38 in adjusted earnings per share, not far from our $2.56 billion, $290 million, and $1.41 respective marks.

We continue to believe Hain's U.S. turnaround is the key to value realization. The unit's net sales fell 2% for the year (1% after excluding acquisitions, divestitures, and discontinued products) after a 5% dip in fiscal 2017. While segment adjusted operating margin lagged our 11% estimate (at 10%), we still see the turnaround tracking well as stock-keeping unit rationalization progresses and as some of the underperformance is timing-related. However, even with this progress, we contend that Hain does not benefit from a durable competitive advantage, an assessment borne out by gross margin degradation caused by freight costs and increased competition; companywide adjusted gross margin decreased around 120 basis points to 21%.

We believe Hain's management team has earned a Poor stewardship rating as a result of an accounting scandal and numerous operational missteps. Our view hasn't changed even after the company announced that the Securities and Exchange Commission investigation into its 2016-17 accounting scandal ended without penalty.