US natural and organic food group Hain Celestial booked bumper third-quarter results this week. While sales were boosted by acquisitions, the company is also reaping the benefits of broader industry trends, including the rise of the natural and organic sector in the US and the continued resurgence at the higher end of the market. Katy Humphries reports.
Hain Celestial, the US natural and organic food maker, reported a jump in third-quarter net income earlier this week, boosted by a near 30% rise in sales and improved margins.
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Despite a 28.2% rise in cost of sales, gross profit rose 34.2% to US$82.6m in the quarter. Gross profit margins expanded 90 bps to 28.6%, reflecting a favourable product mix even after the higher input costs, the company said.
The Celestial Seasonings maker also revealed that sales hit “record” levels during the period, rising 29.8% to $288.4m.
On the back of its strong top- and bottom-line performance, Hain raised its full-year outlook to sales of $1.09-$1.1bn and earnings of $1.30 -1.34 per share for fiscal 2011. Earlier this year, the company had forecast revenue of $1.06-1.08bn and earnings of between $1.24 and $1.31 per share.
Acquisitions have formed a central plank in Hain’s expansion strategy, building the group’s market share, extending its portfolio of well-known brands in the US natural and organic sector and providing opportunities to cross-sell in other markets.
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By GlobalDataOver the past 12 months, Hain has completed a number of acquisitions, including Sensible Portions snack maker World Gourment Marketing, UK ready-to-eat food group Churchill Food Products, and US yoghurt maker 3 Greek Gods. Most recently, the company announced the acquisitions of French organic food manufacturer Danival and GG UniqueFiber, a Norwegian manufacturer of all natural high fibre crackers.
All of these acquisitions have seen sales accelerate in the third quarter and are expected to be accreditive to EPS, UBS analysts suggested in a note to investors.
“The acquisitions of Greek Gods and Sensible Portions turned out to be extremely well-timed and the company seems to be executing on its goals of broadening distribution to build sales momentum. During the third quarter the businesses (acquired in June/July 2010) contributed 15% of sales growth, which was 7% greater than the second quarter and implies increasing sales contribution,” the analysts wrote.
Hain’s top-line has also witnessed strong underlying growth, with gains across its existing portfolio in the US, Canada and Europe.
According to Barclays Capital estimates, Hain’s organic growth during the third quarter came in at approximately 12%, with consumption in its US grocery business – which represents 40% of sales – up by around 5%.
In a note to investors, Barclay’s Capital analyst Andrew Lazar suggested that the real strength of Hain’s performance can be witnessed in its improved distribution in mass grocery channels.
“In this recent quarter, Hain’s strength was broad-based, with momentum diversified across all channels,” he wrote. “This is important because, if Hain is entering a period of consistent distribution gains across mainstream outlets, this would likely give investors far more visibility into more sustainable mid-to-high single-digit organic top-line growth moving forward.”
According to industry body the Organic Trade Association, sales of organic products through mass channels – supermarket, club or warehouse stores and mass merchandisers – have steadily increased in recent years despite the volatile economy.
Figures released by the OTA reveal that in 2009 mainstream channels sold 54% of organic food, up from 45% a year earlier.
“Certainly, we are seeing a greater proportion of organic sales come through more mainstream outlets, supermarkets and the like. And this trend coincides with an increase in the overall value of the organic market,” a spokesperson for the OTA told just-food.
The bifurcated consumer recovery in the market has seen higher-earners bounce back to pre-slump spending patterns at a greater speed than those in lower socio-economic brackets and Hain – along with other upmarket players such as retailers Whole Foods Markets and Harris Teeter – has reaped the benefits. According to the latest sales figures from the OTA, US organic sales rose 7.7% to over US$28.6bn in 2010, outpacing growth of the overall food sector which expanded by around 1% in the period.
The growth of natural and organic market and its expanding presence in mass grocery channels both bode well for Hain and, as a consequence, during the quarter the company was able to expand its US distribution, with approximately one-third of revenue growth coming from incremental distribution.
Additionally, if the US economy continues on its trajectory of gradual revival, demand for healthier and natural food is likely to continue to improve. Hain’s portfolio of on-trend strong brands leaves the group well-positioned to capitalise on the market-beating growth of this category.
