Natural and organic packaged foods and personal care products maker Hain Celestial Group Inc. (NASDAQ:HAIN) reported second-quarter financial results on Feb. 1, and it was a mixed bag, despite reporting the highest total quarterly revenues in the company's history.
Hain Celestial recorded net sales of $752.6 million, up 8%, and a 6% increase in earnings per share. While this is a solid result overall, its U.S. and U.K. sales are struggling, with a 4.7% decline at home and a 3.3% drop in the U.K. Hain Pure Protein -- which was a part-owned joint venture a year ago -- reported 64% growth, while its joint venture for sales outside the U.S. and U.K. were up 34%. That makes it two quarters of declining U.S. packaged food sales after years of double-digit growth and in the company's largest business segment.
Here's a closer look at the company's results in the quarter, as well as what management intends to do going forward to turn things around at home.
Hain's results by region and business:
Specifics that affected U.S. sales in the quarter
While the U.K. results have been negatively affected by foreign currency exchange in the face of a strong U.S. dollar, U.S. sales are suffering, according to management, because of the following:
- Celestial Seasonings bag tea business was down 10% in Q2.
- All tea sellers felt the impact of warm quarter; the category was down 6%.
- Sensible Portions snack sales well down from last year.
- Management blames Wal-Mart "clean floor" merchandising shift for a majority of this drop.
- Maranatha nut butter sales are rebounding, but still suffering from last year's voluntary recall.
- This includes $20 million in annual private label business that the company is trying to regain.
- Spectrum coconut oils were down because of price competition.
Management talked at length on the earnings call about the challenges it is facing with these key products, and pointed to -- something that was brought up last quarter -- the weakness in the center of the grocery store, while there is more growth happening on the perimeter. Founder and CEO Irwin Simon also emphasized that it wasn't competition from major consumer packaged goods that's taking share from them.
Thee recent results by General Mills (NYSE:GIS) tend to support that. General Mills reported that its second-quarter U.S. retail sales fell 3.5%, while total sales were down only 2% when adjusted for currency exchange.
What management is doing about it
In the earnings preview, we outlined some of the things that management talked about at the recent IRC Conference, but there was more on the earnings call.
- Working with Boston Consulting Group to identify and implement cost savings.
- This includes rationalization in supply chain as well as better marketing efforts and partnership with resellers.
- Implemented marketing support to address Celestial Seasonings decline.
- The company changed packaging recently, and is convinced this is part of the short-term challenge. Reporting a 10% spike since adding in-store signage to draw more attention to product.
- Working with Wal-Mart to reposition Sensible Portions product to high-traffic snack aisle in Wal-Mart stores, as well as add secondary shelving in stores over the summer.
- Working to regain lost private label nut butter business, and rebuilt retail sales of Maranatha following last year's recall.
- Have implemented some price support in Wal-Mart stores on this product as well.
- Implemented 10% price cut in Spectrum oils in order to regain lost market share to lower-cost competitors.
Simon emphasised that these things will take time to play out, but that the early results were already positive, and that they expected for net sales in the U.S. business to be flat by the fourth quarter.
Some bright spots
Executive Vice President John Carroll pointed out that the issues above cost the company about $28 million in net sales in the quarter, and without them U.S. sales would have increased more than 3%. He also said that with the exception of Celestial Seasonings, the company's top 12 brands saw consumption growth of 3.4% in the quarter. At the same time, the company reported high-single-digit to double-digit consumption growth in 10 key brands last quarter.
Carroll also pointed out that Amazon is the company's fastest-growing top 10 customer, and it is Hain's No. 1 baby products customer.
Hain Pure Protein could continue to be a bright spot for the company. Simon said that they were adding capacity, and that he expected they could continue to expand gross margins, as demand for higher-margin packaged and branded GMO-free, natural, and organic deli meats continues to grow.
Focus on process and cost improvement
At the IRC Conference in January, Simon cautioned that acquisitions, which have been a major driver of growth over the past decade, may slow because of growing competition to acquire small natural foods companies. He also said that Hain would continue to acquire the right brands to add to the fold, if the fit and price made sense.
But he emphasized on the earnings call how they would now be focusing on costs and processes:
When we would do an acquisition, we would integrate it into our purchasing, integrate it into our procurement. And if they were buying one size glass jar, we continue to buy that glass jar for them. Or if they were buying a certain sea salt, we continued to buy it. What we plan to work with, with BCG, is how we get down to three glass jars or how do we get down to two sea salts? And how do we look at our ingredients? How do we come back and look at our freight handlers and using one lane or two-lane? If we have 18 distribution centers, do we have the wrong distribution centers?
In other words, a hard look at how can the company better leverage its scale to improve profitability and drive sales.
There are some key concerns in Hain's core U.S. business, but there is also growth. The key question is whether -- and how quickly -- management's steps to address the weak spots will pay off and how long growth in its international and protein businesses will drive the positive results.
Management reiterated full-year guidance, with sales between $2.9-$3.04 billion, and EPS between $1.95-$2.10, good for 7%-13% sales growth, and 15%-30% EPS growth for the year.
Will the steps management is taking pay off? Time will tell, but the company has a pretty solid history of reaching its guidance.
Jason Hall owns shares of Amazon.com and Hain Celestial. The Motley Fool owns shares of and recommends Amazon.com and 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.