Packaged natural and organic foods maker Hain Celestial Group Inc. (NASDAQ:HAIN) reported its fiscal 2018 second-quarter results on Feb. 7, announcing that sales were up 5% overall and earnings surged 73% to $0.45 per share, in part from cost savings related to its Project Terra initiative. At the same time, U.S. sales -- Hain's biggest market -- fell 3% in the quarter, while the company works to rationalize its product lineup and focuses on its best-growing and most-profitable brands and products. 

And that's only part of the story. The company also announced that it was exploring the sale of its Hain Pure Protein poultry business, which it had only taken full control of a few years back, and had substantially grown since. This move set off speculation that divesting a part of its business that didn't really fit with its packaged-foods core, it could be the first step in prepping Hain to be acquired.

Young man comparing products in a supermarket.

Image source: Getty Images.

At any rate, it's clear that management is focusing more intently on the core packaged foods business while also making the business more profitable and less complex. Let's take a closer look at what it means for investors going forward. 

A closer look at the financial and operating results

Here are some of Hain's key operating and financial metrics:

Metric Q2 2018 Q2 2017 Change (YoY)
Revenue $775.2 $740.0 4.8%
Net income $47.1 $27.2 73.3%
Earnings per share $0.45 $0.26 73.1%
Adjusted EPS $0.41 $0.32 28.1%
Operating income $36.3 $41.4 (12.3%)
Adjusted operating income $62.1 $51.3 21%
Gross margin 18.6% 18.7% (0.5%)
Adjusted gross margin 20.2% 18.8% 7.4%

Data source: Hain Celestial Group. Revenue and income figures in millions. 

A note on the adjusted figures: Hain management says Project Terra has resulted in a significant amount of non-recurring expenses, including charges related to SKU rationalization, restructuring and integration, and some acquisition expenses, which are excluded from the adjusted metric in an effort to reflect a better comparison between periods. 

Adjusted numbers can be handy for the reason described; however, investors should take caution, as many companies report some amount of non-recurring charges nearly every quarter. But in Hain's case, it makes some sense to look at the operating results excluding Project Terra costs, as well as GAAP results. 

What's the takeaway? Hain's adjusted results -- particularly earnings per share -- reflect how the company benefited from some non-recurring items that may have artificially inflated profits this quarter. Adjusted earnings per share increased 28%, versus 73% on a GAAP basis. This is a case of adjusted results that are potentially more realistic than GAAP because of benefits that won't show up every quarter. Furthermore, the adjusted results also show us that -- potentially -- Project Terra is paying off, with higher margins and operating income. The key will be to see if those gains eventually translate to GAAP in future quarters. 

U.S. sales are still declining. Here's why -- and where there's growth

This has been a recurring concern for Hain for some time, as increased competition and changing consumer trends, along with some challenges maintaining shelf space with major retailers, has put some pressure on Hain's sales in the United States. Over the past year, Hain has prioritized its 500 most popular and best-growing SKUs in the U.S., which make up 93% of U.S. sales. Unfortunately, sales of those products in the so-called "MULO+C" channel, a major segment of food retail, fell 2.3% in the quarter, while U.S. natural and organic category sales were up overall. 

The company also continues to feel the drag of SKUs it is discontinuing as part of its top-500 focus. Hain North America CEO Gary Tickle said the company had identified over 700 SKUs it either has phased out or will do so by early 2019, and that those efforts took a $4.4 million bite out of the company's U.S. sales in the quarter, more than half of the $8.3 million revenue decline. 

However, Hain said it was seeing growth in non-measured channels, with its top 500 SKUs growing sales by 10% in the quarter. The non-measured channel includes and subsidiary Whole Foods Market, as well as membership warehouse retailers such as Walmart's Sam's Club subsidiary, and Costco.

Of these channels, management says it's doing exceptionally well in e-commerce, having grown its business from "minimal" sales three years ago, to over $80 million in the U.S. over the past year. Furthermore, the company expects that over the next three years, it could triple its own direct e-commerce sales, while continuing to participate in the expansion of sales from other major e-commerce retailers like Amazon. With some estimates that online food sales could reach $100 billion within five to seven years, with an outsize portion of that being organic and natural foods, Hain is taking steps to make sure it's a part of that transition. 

Final thoughts: Don't get caught up in acquisition speculation

As mentioned, the company also announced its intention to explore selling off Hain Pure Protein, immediately creating speculation that Hain was a step toward being acquired by a major packaged-foods company. Between spending the past several years investing significant resources into HPP, and management's statement that doing so has only recently started to fully pay off, creates further speculation on what a sale of HPP would mean for Hain's future as a standalone company. 

Here's the bottom line: It's a (small-f) fool's errand to spend too much energy speculating on what happens ifHain sells HPP. It's easy to draw imaginary lines between this seemingly uncharacteristic move and Hain being acquired soon after, it doesn't really answer the important question: What should investors expect? 

Here's what we do know: So far, Project Terra has resulted in some cost savings, while also having a (hopefully temporary) negative impact on U.S. sales related to product elimination. We also know that Project Terra's benefits are expected to accelerate as the year continues, and management is projecting adjusted earnings per share between $1.64 and $1.75 per share, a 34% to 43% increase from 2017. At recent share prices, Hain trades for 21 times the high end of its adjusted earnings guidance. That's not cheap, but it's probably reasonable if the company can leverage Project Terra into more double-digit earnings growth in the years ahead, something that would probably require U.S. sales to recover and start growing again. 

If management really is just buffing up the company for a sale in the near future, it will happen, and probably at some premium to today's share price. But it's probably not something investors should spend too much time thinking about.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.