For a company with a significant portion of its business in organic food, it should come as little surprise that Hain Celestial, the maker of brands including Rice Dream and Linda McCartney, has fallen short of expectations over the last 12 months. The US food group insists it has the credentials to grow in the year ahead – but is its confidence justified? Dean Best reports.
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“What a tough year it was. I’m glad it’s over.”
Irwin Simon, Hain Celestial’s plain-speaking president and CEO, was suitably frank about the last 12 months when the company issued its annual results on Wednesday (25 August).
Hain posted a net loss of US$24.7m for the year to 30 June – against net income of $41.1m a year earlier – thanks, the company said, to costs linked to an SKU rationalisation programme and its Hain Pure Protein venture.
The company, which is building a fledgling business in Europe, also saw its UK business suffer from the loss of a supply contract with Marks and Spencer and a co-packing deal with HJ Heinz.
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By GlobalDataOver the full year, Hain’s company-wide turnover climbed 7.4% but, tellingly, its fourth-quarter sales slid by 5.6%. Foreign exchange may have weighed on Hain’s top line in the three months to the end of June but, stripping out currency fluctuation, sales were still down.
Unsurprisingly, Hain has suffered as demand for organic food has waned during the recession, while the rise of private label has also had an impact on the business.
“It’s been a long year,” Simon told analysts as Hain published its numbers. “It almost feels like it has been two years rolled into one.”
However, the ebullient Hain boss pointed to “good growth” from the group’s domestic business and said he expects the company’s European operations to break even over the next 12 months.
Demand for organic food may have slowed, Simon said, but Hain’s focus on health and natural – two trends that, he maintained, remain popular among consumers – would stand the business in good stead in fiscal 2010.
“Maybe people are trading down and maybe people are leaving the organic category but we have a multiple amount of other categories that we will bring people into,” Simon said. “Yes, organic is a big part of our company but we have multiple other catgeories that are focused on health and natural that we will continue to grow.
Warming to his theme, Simon added: “Spending money on brands is something we will continue to do this year. We have got show value out there. Every consumer wants health but every consumer also wants value.”
Sitting alongside Simon was John Carroll, the CEO of Hain’s US business. He echoed his boss’s claim that Hain’s domestic operations were strong and said the company could grow sales in the year ahead through a number of initiatives that the company would look to pursue this year – expanding distribution, beefing up its value offerings and rolling out new products.
“Our fourth-quarter performance indicates that, despite the economy, Hain USA’s business is robust,” Carroll said.
Analysts, however, have quite rightly, raised some questions on Hain’s performance in the last three months – and have cast some doubt over the company’s optimism about the year ahead.
Andrew Lazar, senior packaged food analyst at Barclays Capital, claimed Hain’s operating results were “quite weak” and pointed to a 35% slump in EBIT.
“And, with our first glimpse at true organic growth in several quarters, it became clear that a major driver of the operational shortfall was a significantly weaker top-line, impacted by the macro environment where consumer trade-down and private-label market share gains continue,” Lazar wrote in a note to clients.
Lazar questioned Hain’s forecast that it would see sales rise by 4-6% on an organic basis in the year ahead. In challenging trading conditons, Hain, Lazar said, will need to spend heavily behind its brands to meet that target.
“Achieving 4-6% organic sales growth could well be tricky in the current environment and, therefore, more costly,” Lazar said. “For example, F4Q sales were down despite a positive contribution from pricing in the quarter, which no longer plays a role in FY10.”
Lazar added: “Volumes were down in the low single digits, by our math, despite a 64% increase in couponing activity, which simply underscores to us that significant reinvestment in trade spend will be necessary in FY10 in order to restart sales growth.”
Lazar acknowledged that Hain’s plans for distribution gains in the US “make sense” but whether the company succeeds is unclear, he said. “This has been the case for a long time, and it’s not altogether clear to us what’s different this time to finally drive increasing distribution, particularly given today’s difficult environment and cautious consumer.”
The pessimism around Wall St over Hain does not just stop at Barclays Capital. Greg Badishkanian at Citi yesterday lowered his estimate for the company’s fiscal 2010 and fiscal 2011 earnings per share.
Badishkanian set a target price of $20 a share for Hain’s stock (which, at the time of writing, stood at $16.19) but warned of a series of risks that could prevent the company from reaching that level.
“Risks to the stock achieving our target price include weak natural food industry fundamentals [and] the company’s low presence in the faster-growing product segments, for example, refrigerated soymilk,” Badishkanian wrote in his note to clients.
“Also, we believe Hain will need to increase its already high level of marketing spending (much of it being non-consumer-focused) in order to achieve its goal of penetrating the mass channels.”
Despite the bullishness of Hain’s management on the call to analysts, officials at the company could not be reached as just-food went to press. There is no doubting the confidence that Simon and his fellow Hain executives have in the company’s prospects.
However, the current recession-fuelled weakness in some of Hain’s categories – and the number of tasks that lie ahead for the company – means the next year looks set to prove just as challenging as the last 12 months.
