Hain Celestial's star shines brightly

by Joshua Sosland
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Hain Celestial is in the sweet spot for growth within the food and beverage sector.

Anyone looking to understand the rush among sluggishly growing consumer packaged goods companies to shed additives and artificial flavors in their foods while adding natural and organic selections to their product lineup need look no further than the example of Hain Celestial, Lake Success, N.Y.

Focused on the natural and organic categories for decades, the company continues to enjoy standout success measured in numerous ways. In trading on Nasdaq, shares of Hain rose June 23 to a new 52-week high of $68.61 per share, up 18% year to date. Hain shares easily have outpaced the 4.4% gain year to date in the S.&P.500 and the 0.2% decline in the Diversified Food Company index compiled by Food Business News. For Hain, the strong share price performance comes even after a period of the strongest gains in the company’s history. In the five years since June 2010, Hain shares have jumped 580%.

With the approach of the end of the company’s fiscal year (June 30), Hain’s operating results remain strong. Sales in the nine months ended March 31 totaled $2,007 million, up 28% from the year before. While year-to-date net earnings were down slightly, income adjusted for numerous one-time items was up 16%.

Even as competition heats up in the natural and organic food sectors, Hain executives remain confident in the company’s prospects, both within the United States and globally.

In addition to painting a bright picture of the company’s future, one executive emphasized this track record of growth during the recent Piper Jaffray Consumer Conference.

“Our CAGRs (compound annual growth rates) in regard to top line as well as adjusted bottom line are better than 25% in the last couple of years,” John Carroll, executive vice-president and head of the Hain U.S. business, said during the June 9 conference. “As a matter of fact, the adjusted e.p.s. (earnings per share) was over 30%.

“And look, we’re well poised and positioned against the two primary constituencies that matter in terms of growth. One is millennials increasingly want to buy more and more natural organic products, and we also have great appeal to retailers because they see the growth in natural and organic and they want to bring our products in regardless of their channel.”

In the natural and organic categories, Hain Celestial participates in a variety of segments in the food, beverage and personal care industries. Its leading brands among dozens and dozens include Celestial Seasons, Terra, Garden of Eatin’, Health Valley, WestSoy, Earth’s Best, Arrowhead Mills, DeBoles, Hain Pure Foods, FreeBird, Hollywood, Rudi’s, Spectrum Naturals, Spectrum Esstentials and Walnut Acres.

“We would argue we have a brand portfolio that is the envy of the natural and organic better-for-you industry,” Mr. Carroll said.

Hain Celestial share price vs. S.&P. 500

While Hain achieved much of its early growth in specialty retailers focused on natural foods, the company has pivoted toward what executives term as a “channel agnostic” stance. By pursuing growth in a broad array of channels, Hain opens opportunity for accelerating gains even if its growth diminishes somewhat in its health foods retailer base.

“As we do the math, we just see a shift to conventional and a little bit of a slowdown in the natural channel,” Mr. Carroll said. “It’s not dissimilar to when Wal-Mart came into grocery. Everybody was looking at their grocery number saying, ‘Oh my goodness!’ No. It just moved over to Wal-Mart.”

Distribution gains have been a significant source of growth for Hain, Mr. Carroll said. Commenting on strong sales in the third quarter, he said the company enjoyed 10% net gains in terms of distribution at customers like The Kroger Co., Wal-Mart Stores, Inc. and Target Corp. The potential for increased distribution alone poses the potential for major growth in years ahead, he said.

“When you think about our business, growing distribution is the No.1 catalyst for driving our consumption forward,” he said. “We continue to see that our top 200 s.k.u.s (stock-keeping units), which account for 50% plus of our sales, have less than 25% A.C.V. (per cent all-commodity-volume distribution) today. So when you think about it, look, why can’t those s.k.u.s drive up to at least 50% A.C.V.? So what that means is we could be doubling our business in what would be called the Nielsen or I.R.I. measured channels.”

Asked about rising competition from private label, Mr. Carroll acknowledged the success Kroger has achieved with its Simple Truth natural and organic line. He said the brand had $1.2 billion in sales its first year. Replicating this success is anything but simple, he said.

“Kroger did the best job of executing a private label launch that we’ve seen, but not everybody can do what Kroger did,” he said. “Not everybody owns the production capability that they have. Not everybody has the scale that they have. And those are two key pieces people need if they’re going to execute well in private label.”

Still, Kroger’s success has generated broader interest. For example, natural and organic private label sales growth was highlighted recently in comments by a top executive of TreeHouse Foods Inc., Oak Brook, Ill. Dennis Riordan, executive vice-president and chief financial officer of TreeHouse, pointed out in a May call with investment analysts that private label prices in the natural and organic command a 25% to 30% premium.

“That effectively puts it at parity with national brands,” he said.

Competition from such brands as Kroger's Simple Truth line may challenge Hain's future rate of growth.

Mr. Riordan said organic private label sales have climbed to 12% of the Treehouse total, up from about 9% a year ago.

“Consumers are willing to pay for the better products, and the shift in consumer preference for more natural products is very good for private label,” he said.

Mitchell B. Pinheiro, a senior equity analyst at Imperial Capital L.L.C., said headwinds from increased competition or Hain’s inundation of the health foods retail sector do not mean the company’s days of growth will be ending any time soon.

“They are in the right categories with the right products with strong underlying demand for all their goods,” he said. “I like the fundamentals. I see double-digit bottom line growth at least until 2020.”

Mr. Pinheiro predicts double-digit top-line growth over the next few years, too, slowing to upper single-digit growth with the approach of 2020.

Investment prospects may be less promising, Mr. Pinheiro said, pointing to the company’s current stock price multiple of 18 times forward EBITDA. Hain’s price-to-earnings ratio is a hefty 53.

Mr. Pinheiro initiated coverage of Hain in July 2013 with a rating of “outperform” and lowered the rating to “market perform” in November 2014.

“The risk/reward was not favorable,” he said of the downgrade decision. “The growth is baked in already. It’s strictly a valuation call. Everyone loves Hain, but it leaves very little room for upside at current price levels and vulnerable if they miss even a little on results.”

Beyond the company’s consistent operating growth, Hain’s shares have been boosted by what Mr. Pinheiro calls “scarcity value” when it comes to publicly traded companies in the natural and organic sector.

“Hain is in some respects the ETF of the health and wellness industry,” he said. “You have a little of this, a little of that. It’s a broad-based portfolio.”

He said investment managers of large cap investment portfolios have few choices if they want exposure to the health and wellness sector. They may be opting for Hain, even though the company’s market capitalization of $7 billion leaves it a little small to meet the definition of a large cap stock (usually carrying a minimum valuation of $10 billion). This kind of investing may be inflating the value of Hain shares, he said.

For all that, he acknowledges that the company and its shares have shown remarkable staying power.

“I’ve been wrong,” he said. “The stock has been up since my downgrade.”

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