Morningstar | Weak 2Q Results, Slashed Guidance Highlight Hain's Risks; Shares Cheap but Demand Patience
After yet another weak quarter, we plan a high-single-digit percentage cut to our $29 fair value estimate for no-moat Hain Celestial. We still expect long-term improvement as new CEO Mark Schiller’s agenda takes effect and the firm culls unprofitable items, reduces supply chain complexity, and corrects pricing. We expect low- to mid-single-digit sales growth and adjusted operating margin expansion toward the low teens (from 7.6% in 2018) over the next 10 years.For the second quarter, sales fell 5% (1% on a comparable basis) on a 5% adjusted operating margin (down nearly 300 basis points). Management slashed full-year guidance to $2.32 billion-$2.35 billion in sales, $185 million-$200 million in adjusted EBITDA, and $0.60-$0.70 in adjusted earnings per share (from $2.50 billion-$2.56 billion, $275 million-$300 million and $1.21-$1.38, respectively). This is below our $2.5 billion, $257 million, and $1.09 respective marks.
Struggles in Hain’s home market (44% of fiscal 2018 sales) continue to be the most pronounced. For the first half of the fiscal year, U.S. net sales were down just under 6% on a 4.2% adjusted operating margin (down 590 basis points and below our full-year targets of flat revenue and 10% margin) as Hain continues to eliminate underperforming items and cut costs. However, we are encouraged by the long-term opportunity for key brands as Hain redirects resources to its most attractive labels (such as Terra, Sensible Portions, and Greek Gods, which showed mid-single-digit velocity growth in the quarter, excluding distribution losses). As the portfolio is streamlined, Hain should be able to boost distribution for its core items, an area of opportunity considering that only 20% of its core 150-200 items have more than 50% all-commodity volume distribution. Still, the turnaround could take time and result in continued share price volatility, necessitating patience for investors looking to capitalize on new management's resuscitation efforts.
Hain Celestial Group manufactures, markets, distributes and sells organic and natural products. The company sells its products in the following categories: grocery, which includes infant formula, infant, toddler and kids foods, as well as other food products; snack products, which includes a variety of potato, root vegetable and other vegetable chips, straws, tortilla chips, whole grain chips, pita chips and puffs; personal care, which includes skin, hair and oral care, deodorants, baby care items, body washes, sunscreens and lotions; and tea, which provides varieties of herbal, green, black, wellness, rooibos and chai tea.
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