Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

For a minute there, it seemed like Hain Celestial thought it could slide by investors without focusing on profits. No longer.

Over the past few years, as consumers shifted to healthier and organic foods, Hain Celestial enjoyed runaway sales growth that helped it outpace larger competitors. Executives were so busy buying new brands and trying to juice sales that they didn't seem to worry too much about profit.

Parsing Profits
As the rest of the packaged food industry improved gross margins, Hain Celestial's gross margin declined
Source: Bloomberg Intelligence
Median gross margin is calculated for 150 North American packaged food companies followed by Bloomberg

But sales began to slow, hurt by the ripple effects of struggling health-food grocers such as Fairway and Whole Foods and a fight with Walmart over promotions it wanted to offer customers. Traditional snack-food competitors elbowing into the organic, natural, and better-for-you business didn't help, either.

The real wake-up call came when sales growth turned negative in the U.S. a few quarters ago. At that point, Hain could no longer avoid the cost-cutting wave smashing into the rest of the packaged-food industry. 

The disappointing results continued on Wednesday; though Hain's sales surpassed analyst estimates, its profits did not. The company also forecast a weaker year than it had previously predicted, narrowing its 2016 sales guidance to between $2.95 billion and $2.97 billion, down from a range of $2.9 billion to $3.04 billion. It brought down the range of its adjusted earnings per share to between $2 and $2.04, from $1.95 to $2.10. 

A Little Less Celestial
Sales growth at Hain Celestial has slowed
Source: Bloomberg

More importantly, the maker of Celestial seasonings tea, Terra Chips, and about 50 other better-for-you brands many consumers have never heard of, said on Wednesday it's undertaking a "strategic review" to identify $100 million in cost savings over the next three years. These include finding cheaper ways to procure, make and distribute products.

It will also prune its growing product line to focus on fast-moving items within its core brands -- which means getting rid of slow-moving products, as well as some smaller, "non-core" brands. It will also launch a "venture unit" tasked with incubating smaller brands and investing in new health and wellness products.

The company created a new COO position to oversee the changes and said freeing up cash will help it build its brands and drive toward its goal of $5 billion in revenue by 2020. While it said it would look at acquisitions, much of the focus of its earnings call was on boosting margins and returning its U.S. business to growth, where it brings in roughly half of its sales. 

Investors cheered the shift in thinking, pushing the stock up as much as 10 percent. Before Wednesday, the shares were down 33 percent over the past year, compared to a 2.4 percent drop for the S&P Packaged Food Index. 

Unhealthy Returns
Hain Celestial's shares have dropped by 33 percent in the past year
Source: Bloomberg

Wall Street analysts have trimmed expectations for the stock, bringing down the consensus 12-month price target to $47.40 a share from around $70 just six months ago. But with two-thirds of the analysts tracked by Bloomberg rating the stock a "buy," the sentiment remains pretty bullish. Perhaps that's because the stock is now valued in line with, or below, peers such as Pinnacle Foods and General Mills, with a forward P/E ratio of 19, compared to a 31 forward multiple six months ago. Competitors' stocks, meanwhile, have been pumped up in anticipation of further M&A in the industry. 

Lowering Expectations
Analysts remain bullish on the stock, but have slowly ratcheted down expectations
Source: Bloomberg

Just the promise of conversion -- a shift in focus toward cutting costs and returning to previous sales growth levels -- seemed to be enough to get investors excited about this company again. But buyer beware -- it could take years for Hain Celestial's pledges to bear fruit.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net