Hain Celestial shares drop 19% after 'truly disappointing' second quarter
Hain Celestial Group's shares fell by 19% on Thursday — and even stopped trading for a while — following second-quarter results President and CEO Mark Schiller told analysts were "truly disappointing," according to a transcript of the call. The decline to $14.45 per share was the organic and natural food company's lowest price since October 2011, according to Bloomberg.
The New York-based company — which produces brands including Celestial Seasonings, Terra Chips, Arrowhead Mills, MaraNatha and Garden of Eatin' — posted a 4% net sales drop in the U.S., 5% in the U.K., and 8% elsewhere, according to the company's most recent earnings report. The company's earnings per share missed targets by a wide margin. There was a loss per diluted share of $0.28, compared to earnings of $0.41 a year ago, and the adjusted earnings per share of $0.14 was less than half of the $0.32 last year.
Hain Celestial noted pressure from commodities and transportation costs created headwinds during the second quarter, but there's also increasing competition in the snacking and natural food industry. Irwin Simon, company founder and former president and CEO, recently suggested Hain Celestial might be on the block for a potential sale, Bloomberg reported. No further details were provided.
Hain Celestial has had a bad run lately, and Thursday's second-quarter earnings release brought more of the same. According to MarketWatch, the company's shares have fallen 49% over the past 12 months, and Hain Celestial isn't expecting things to improve much anytime soon. The company projected sales for fiscal 2019 of $2.32 billion to $2.35 billion, which is a drop of 4% to 6% from fiscal 2018.
Mark Schiller, who just came on board last November, emphasized the company's "new strategic direction," which he said would take Hain Celestial to the next level of performance.
"Although we are not satisfied with our near-term performance, we are starting to see sequential improvement in our numbers and are working diligently to restore profitable growth in the United States, while continuing our profit momentum in the United Kingdom and Europe," he said in the earnings report. "My team and I have been in similar situations during our previous roles, which gives us confidence in our abilities to execute Hain Celestial's business transformation," he said in a release.
Hain Celestial has struggled to maintain profits in the face of rising competition and expenses. As Jason Hall of Motley Fool wrote, the company reported both a net loss and an operating loss, which is never a good sign.
"Any way you slice it, Hain's quarter wasn't pretty. And the fact that it continues to generate operating losses, now burning through cash instead of generating free cash flow, is concerning," Hall wrote.
Schiller acknowledged during Thursday's earnings call that the company has issues that need fixing and decisions that need to be made. One major issue are the 55 brands and related products crowded within the company's portfolio.
"We have a long-tail of unprofitable and low velocity SKUs resulting from launching too many new line extensions that really didn't add growth to the specific brands or categories," he said, according to a Seeking Alpha transcript. "As a result, they didn't earn their space on the shelf and we lost considerable distribution and faced more distribution losses going forward. We've made some uneconomic investments and pricing decisions in pursuit of volume at any cost."
Schiller also said Hain Celestial had made its supply chain more complex without understanding its full cost, leading to lost profits in the United States.
While the company's new leader seems to understand what needs to be done to turn things around, accomplishing it may take longer than expected. Meanwhile, expenses continue to rise and competition for healthy snack products continues to grow.
Financial problems are nothing new for Hain Celestial. In August 2016, the company delayed its earnings reports because of major accounting errors. Problems related to lax internal controls plagued the company for years, and it finally settled with the U.S. Securities and Exchanges Commission in December. In the midst of these problems, Simon stepped down and Schiller took the helm just as the company last reported earnings in November.
Rumors of an acquisition have been circulating for some time — with Nestlé one of the names mentioned — but the Swiss giant reportedly was only interested in buying Hain if it shed its poultry business. Pilgrim's Pride bid on Hain Pure Protein last summer, but a deal hasn't yet taken place. The segment's second-quarter net sales fell 7% compared to the year-ago period, so its appeal doesn't exactly stand out at the moment. There are also antitrust concerns should Hain Pure Protein be sold to Pilgrim's Pride or another large poultry firm.
It could be tough for such a large and diverse company to maneuver itself into becoming a financially favorable acquisition in the near term. Given this latest financial report, it might be time for the company to sit tight and, as Schiller phrased it, simplify its business and focus more resources on core higher-margin brands with mainstream potential — before outwardly putting itself up for sale.