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Elevator Pitch
The Hain Celestial Group, Inc. (NASDAQ:HAIN) shares are rated as a Hold. I previously wrote about the company’s new corporate strategy referred to as “Hain Reimagined” in my October 24, 2023 article.
For the current write-up, my focus is on Hain Celestial’s latest portfolio rationalization move and the company’s upcoming quarterly earnings release.
I think that HAIN’s recent divestment of its cookie business will help to simplify the company’s business portfolio and aid deleveraging efforts. But I am worried that Hain Celestial’s Q3 FY 2024 (YE June 30, 2024) results announcement in early May will be a negative surprise. A Hold rating for Hain Celestial is maintained following an analysis of its latest portfolio rationalization initiative and a preview of its third quarter performance.
Recent Portfolio Rationalization Move Is A Positive Development
HAIN recently issued a press release on April 9, 2024 revealing that the company had “completed the sale of its Thinsters cookie business.”
There are two key positives associated with Hain Celestial’s most recent portfolio rationalization initiative.
One key positive is that HAIN could utilize the proceeds from the divestiture of the cookie business to fund its deleveraging efforts.
As disclosed in its Q2 FY 2024 earnings call in February, Hain Celestial’s net debt-to-EBITDA ratio or net leverage metric was 4.2 times as of end-2023, and the company’s goal is to lower its net leverage ratio to 3.0 times in the future.
Hain Celestial didn’t mention the actual consideration for the cookie business’ divestment. But HAIN bought the manufacturer of Thinsters cookies for $259 million towards the end of 2021, so it is reasonable to assume that the company should have sold its cookie business for a few hundred million dollars. As a comparison, Hain Celestial had net debt of approximately $756 million on its books at the end of 2023.
The other key positive is that this latest portfolio optimization is aligned with Hain Celestial’s new corporate strategy.
In my late-October 2023 update, I emphasized that “there is lots of room for Hain Celestial to simplify its business operations and take a much more focused approach” as part of its new “Hain Reimagined” strategy. In its April 9, 2024 press release, HAIN noted that this transaction “further refines Hain’s uniquely positioned portfolio of better-for-you brands across five growth categories: snacks, baby & kids food, beverages, meal preparation and personal care.”
It is highly probable that HAIN’s business and share price performance will be better in the future as the company continues to rationalize its portfolio over time. A greater focus on a smaller number of key businesses and product categories should eventually translate into faster revenue growth and profitability improvement. Also, the market is likely to assign higher valuation multiples to Hain Celestial’s shares, when its business portfolio becomes more simplified and more focused for the future.
In a nutshell, I view Hain Celestial’s latest portfolio rationalization move as a favorable development for the company.
But Q3 FY 2024 Results Might Miss Analysts’ Expectations
HAIN is expected to report its financial results for the third quarter of fiscal 2024 (January 1, 2024 to March 31, 2024) on May 3, 2024.
The sell side has a pretty optimistic view of Hain Celestial’s expected Q3 FY 2024 financial performance. HAIN is forecasted to deliver a revenue growth of +2.5% YoY in the third quarter of the current fiscal year, which could potentially represent its first quarter of positive top line expansion since Q4 FY 2022. Also, the market sees Hain Celestial’s normalized EPS contraction narrowing from -40.0% YoY for Q2 FY 2024 to -5.1% YoY in Q3 FY 2024.
I think that HAIN’s actual Q3 FY 2024 results might disappoint the analysts, taking into account three key factors.
Firstly, Hain Celestial is expected to trade off short-term top line growth for long-term margin expansion with its product portfolio optimization actions.
At the company’s Q2 FY 2024 earnings briefing, HAIN acknowledged that it might be negatively impacted by “a near-term revenue headwind as we rationalize lower margin SKUs (Stock Keeping Units).” Earlier, I mentioned in my October 24, 2023 write-up that “it will likely take a couple of years before Hain Celestial can fully enjoy the success of its new ‘Hain Imagined’ strategy.”
In other words, the short-term pain associated with the implementation of the company’s new “Hain Reimagined” corporate strategy is unavoidable.
Secondly, HAIN might have found it difficult to raise prices to boost the company’s profitability in the most recent quarter.
An April 10, 2024 Seeking Alpha News article indicated that the monthly “inflation for food at home” had been lower than 2% between October 2023 and March 2024 with “consumer pushback on pricing” being a key reason for the lower-than-expected food inflation.
The current consensus financial estimates for Hain Celestial point to an expected improvement in the company’s gross margin from 21.4% in Q3 FY 2023 to 23.1% (source: S&P Capital IQ) for Q3 FY 2024. Assuming that HAIN’s actual price increases were much less substantial than what the market anticipated, Hain Celestial’s actual gross margin and earnings in the third quarter of this fiscal year could possibly fall short of expectations.
Thirdly, the unfavorable effects of negative operating leverage could be more significant than what one would have expected.
In early February this year, HAIN revised the mid-point of the company’s full-year FY 2024 (YE June 30, 2024) EBITDA guidance downwards from $160.0 million to $157.5 million. Hain Celestial explained at its most recent quarterly results briefing that it lowered its guidance because “we are seeing some plant costs deleveraging on the lower volumes versus our initial expectations.” In other words, a more modest pace of sales expansion translates into lower plant utilization, which could potentially hurt the company’s profit margins in a meaningful way as result of negative operating leverage.
In summary, I am of the opinion that Hain Celestial’s early-May Q3 FY 2024 earnings announcement could turn out to be a disappointment for the market.
Final Thoughts
I still rate Hain Celestial as a Hold, considering my mixed view of the stock. On the positive side of things, HAIN continues to optimize its business portfolio, as evidenced by the recent sale of its cookie business. On the negative side of things, Hain Celestial is at risk of reporting below-expectations Q3 FY 2024 earnings.
Also, HAIN appears to be trading at a fair valuation, with its operating earnings multiple being close to its operating earnings growth rate. As per S&P Capital IQ valuation data, Hain Celestial’s trailing twelve months’ EV/EBITDA multiple and consensus FY 2024-2027 EBITDA CAGR forecast were 10.9 times and 10.1%, respectively.
