When Hain Celestial Group Inc (NASDAQ:HAIN) last reported earnings, in November, for the first quarter of fiscal 2016, the company ended its streak of 20 consecutive quarters of double-digit sales growth with revenue a 9% sales gain. The good news, however, was that management held firm on its full-year guidance, with CFO Pat Conte stating that management "expect[s] the second quarter to be our strongest quarter."
Unfortunately, it's looking like that didn't turn out as expected, with the company announcing reduced guidance for the second quarter and full year on Jan. 11. Are Hain's best days behind it, or is there a bright future still ahead? Let's take a closer look at what to watch for when Hain reports second-quarter earnings on Feb. 1.
Change in guidance: What's really happening?
Q2 is historically Hain Celestial's largest, as it includes Thanksgiving in the U.S. in November, and the holiday season in December. Here's a look at Hain's guidance from its earnings report in November, and the recent updated guidance:
|Metric||Updated Guidance||Prior Guidance|
Here's a comparison between the company's guidance for the second quarter to be reported on Monday, and its results in Q2 last year:
|Metric||Q2 '16 Guidance||Q2 '15 Actual||Change|
It should be noted that last year's second-quarter profits were heavily affected by a product recall related to the company's nut butter business, so not all of the expected increase in earnings per share is a product of better efficiencies or pricing, but a product of the business returning to health following the recall.
When it comes to the updated and reduced guidance, the thing that really stood out in the announcement was this: "... offset by certain impacts relating to the United States segment including lower consumption and reductions in shipments and inventories at certain customers."
Management gave more insight into what's happening when it presented at the IRC conference on the day after the announcement, with executive VP in charge of North American sales John Carroll saying that the "base business in the U.S. is growing between 3% and 4%."
In terms of trouble areas, he specifically mentioned Celestial Seasonings, which has lost sales over the past year, pointing out that recent changes like updated packaging are yet to play out in turning things around. He also talked about the impact of Wal-Mart implementing a "clean floor" merchandising policy in it stores that took a significant amount of Hain product off display. Carroll said that these two areas alone were costing Hain "over 600 basis points in our growth number."
What they are doing about it
Retail is incredibly competitive, and things like prime shelf placement can make a big difference in product sales. The good news is that Hain isn't standing still, but is actively working with its retail outlets to better position its products. Carroll talked about steps they are taking to increase product count with Celestial Seasonings in order to regain unit share that the brand has lost, and how they have a plan with Wal-Mart to get more snack products on display in the snack aisle, and to also have secondary displays during the summer season.
The Wal-Mart initiative will roll out when that company's fiscal year starts next week, so it will take several quarters to find out how it plays out.
Hain CEO Irwin Simon also talked about the company's focus on growing, as he put it, "from a $3 billion company to a $5 billion company." He said the following:
There are changes we are going to make. We changed the packaging on (Celestial Seasonings) tea. Immediately consumers don't accept it, but it's a build-out over a period of time. We made changes in regards to our merchandisers in our natural food business. It's the right thing to do for the long-term, but do we see the effects right away? So there's a lot of changes within Hain today, to build out for the $5 billion company -- because we see where the demand is.
Simon also pointed out that the global business is growing in the "high single-digit" percentages today, so even with the challenges in the domestic market that are still playing out, it remains a growth industry.
The market for acquisitions could affect growth
Simon spoke at length at the IRC Conference about the marketplace for acquisitions, an area where Hain has excelled over the years. He pointed out that the market for acquisitions has become very hot, but that he would remain disciplined. He said, "we will not do an acquisition just for synergies. We will do an acquisition for growth."
In other words, Simon isn't likely to overpay, and with more and more large packaged goods companies looking to invest in natural foods, that could mean fewer acquisitions, at least until things cool off. In the short term, that could also affect the growth rate, but over the long term, this disciplined approach should continue to pay off for the company, and for shareholders.
Growth may be slowing, but management still focused on years ahead
Hain Celestial is dealing with a bit of a "high-class" problem. Growth is slowing a bit, but largely because there's just more competition because of the increased demand for the products companies like Hain make.
The company might not return to double-digit growth this year, but Simon made it clear that the long-term plan is still to continue growing the business, and they are implementing things to help the company transition from, as he put it, "a $3 billion company to a $5 billion company." It may take a little longer to get there, but often it takes some short-term pain to make the right decisions for long-term gain.
Jason Hall owns shares of Hain Celestial. The Motley Fool owns shares of and recommends Hain Celestial. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.