EUR 850.00 For Business Accounts Only

Morningstar | Weak Start to Hain’s Fiscal 2019 Obscures Long-Term Turnaround Potential; Shares Attractive

We plan a high-single-digit percentage cut for our $32 per share valuation for no-moat Hain Celestial after it posted first-quarter results. We believe many of the causes of Hain’s soft quarter are transitory (ongoing work to refocus the portfolio on top-selling items, execution issues from transitioning to a new mixing center, and production capacity issues for personal care) and maintain our long-term outlook (mid-single-digit sales growth and adjusted operating margin expansion toward the low-teens over the next 10 years). Despite the planned cut, we see the shares as attractive for patient investors willing to endure a turnaround that should take most of fiscal 2019 to show signs of progress.

For the quarter, sales fell 5% (2% dip on a comparable basis) on a 3.7% adjusted operating margin (down 240 basis points). Management reiterated its full-year guidance of $2.50 billion to $2.56 billion in sales, $275 million to $300 million in adjusted EBITDA, and $1.21 to $1.38 in adjusted earnings per share, in line with our $2.52 billion, $276 million, and $1.22 respective pre-announcement marks, though we believe the soft start to the year calls for added caution.

Results were not devoid of positive signs in Hain's home market. We are encouraged the Sensible Portions brand regained significant distribution in a key mass retailer and that customers have not rebelled against recent broad-based mid-single-digit price increases to offset cost inflation (Hain's top 11 brands posted consumption growth across measured and unmeasured channels for the first time since April 2017). As it rebuilds distribution, benefits from higher prices, and completes its efforts to streamline its portfolio and focus on key brands, we believe the second half of the year should show the first signs of performance improvement. Still, we expect sub-2% top-line growth in the U.S. on average over the next five years, behind the mid-single-digit expansion we foresee for the organic category.

We have a favorable view of new CEO Mark Schiller, who brings meaningful experience in ably managing a varied portfolio of brands (most recently burnished at Pinnacle Foods, where he served as chief commercial officer). We believe his priority will be resuscitating the U.S. business and driving operational improvements. We will revisit our poor stewardship rating (set in response to a number of operational missteps and the firm's 2016 accounting scandal) once Schiller provides his strategic road map for the business and begins to execute on his vision.