Natural food company Hain Celestial (NASDAQ:HAIN) missed analysts' expectations in Q2 FY2024, with revenue flat year on year at $454.1 million. It made a non-GAAP profit of $0.12 per share, down from its profit of $0.20 per share in the same quarter last year.
Hain Celestial (HAIN) Q2 FY2024 Highlights:
- Revenue: $454.1 million vs analyst estimates of $462 million (1.7% miss)
- EPS (non-GAAP): $0.12 vs analyst expectations of $0.12 (1.4% miss)
- Free Cash Flow of $14.83 million, up 108% from the previous quarter
- Gross Margin (GAAP): 22.5%, down from 22.9% in the same quarter last year
- Organic Revenue was up 0.2% year on year
- Market Capitalization: $1.02 billion
Sold in over 75 countries around the world, Hain Celestial (NASDAQ:HAIN) is a natural and organic food company whose products range from snacks to teas to baby food.
The company was established in 1993 by Irwin D. Simon. His aim was to offer consumers wholesome and better-for-you food choices. Throughout time, the company has grown through both organic growth and acquisitions, with its 1999 acquisition of the Celestial Seasonings brand as a key milestone.
Today, in addition to the Celestial Seasonings teas, Hail Celestial’s product portfolio includes Terra Chips vegetable chips, Earth's Best baby food and formula, Garden of Eatin’ corn tortilla chips, and Alba Botanica personal and skincare offerings to name a few. The core customer is therefore broad but is generally the head of an everyday American household. This individual does the grocery shopping for the family and values healthier food options at reasonable prices from trusted and established brands.
The company’s brands can be found in many locations selling food and snacks, including supermarkets, club stores, large-format general merchandise retailers, and convenience stores. Additionally, Hain Celestial also sells to food service companies, meaning you can find the company’s products in corporate and school cafeterias, for example.
Packaged Food
As America industrialized and moved away from an agricultural economy, people faced more demands on their time. Packaged foods emerged as a solution offering convenience to the evolving American family, whether it be canned goods, prepared meals, or snacks. Today, Americans seek brands that are high in quality, reliable, and reasonably priced. Furthermore, there's a growing emphasis on health-conscious and sustainable food options. Packaged food stocks are considered resilient investments. People always need to eat, so these companies can enjoy consistent demand as long as they stay on top of changing consumer preferences.The industry spans from multinational corporations to smaller specialized firms and is subject to food safety and labeling regulations.
Competitors offering healthier packaged foods include General Mills (NYSE:GIS), Kellogg's (NYSE:K), and Conagra Brands (NYSE:CAG), all of which did not start in organic and natural foods but have since pivoted towards this segment.Sales Growth
Hain Celestial carries some recognizable brands and products but is a mid-sized consumer staples company. Its size could bring disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale. On the other hand, Hain Celestial can still achieve high growth rates because its revenue base is not yet monstrous.
As you can see below, the company's revenue has declined over the last three years, dropping 5.2% annually. This is among the worst in the consumer staples industry, where demand is typically stable.
This quarter, Hain Celestial missed Wall Street's estimates and reported a rather uninspiring 0% year-on-year revenue decline, generating $454.1 million in revenue. Looking ahead, Wall Street expects sales to grow 4.9% over the next 12 months, an acceleration from this quarter.
Gross Margin & Pricing Power
Gross profit margins tell us how much money a company gets to keep after paying for the direct costs of the goods it sells.
Hain Celestial's gross profit margin came in at 22.5% this quarter, in line with the same quarter last year. That means for every $1 in revenue, a chunky $0.77 went towards paying for raw materials, production of goods, and distribution expenses. 
Hain Celestial has poor unit economics for a consumer staples company, leaving it with little room for error if things go awry. As you can see above, it's averaged a paltry 21.7% gross margin over the last two years. Its margin has also been consistent over the last year, suggesting it will take a fundamental shift in the business to change meaningfully.
Operating Margin
Operating margin is a key profitability metric for companies because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.
This quarter, Hain Celestial generated an operating profit margin of negative 0.2%, down 6.5 percentage points year on year. Because Hain Celestial's operating margin decreased more than its gross margin, we can infer the company was less efficient and increased spending in discretionary areas like corporate overhead and advertising.
Zooming out, Hain Celestial was profitable over the last eight quarters but held back by its large expense base. It's demonstrated subpar profitability for a consumer staples business, producing an average operating margin of 4.3%. On top of that, Hain Celestial's margin has declined by 3.2 percentage points on average over the last year. This shows the company is heading in the wrong direction, and investors are likely hoping for better results in the future.EPS
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q2, Hain Celestial reported EPS at $0.12, down from $0.20 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-term EPS growth rather than short-term movements.
Between FY2021 and FY2024, Hain Celestial's EPS dropped 77.2%, translating into 38.9% annualized declines. We tend to steer our readers away from companies with falling EPS, especially in the consumer staples sector, where shrinking earnings could imply changing secular trends or consumer preferences. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).
On the bright side, Wall Street expects the company's earnings to grow over the next 12 months, with analysts projecting an average 69.2% year-on-year increase in EPS.
Cash Is King
If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.
Hain Celestial's free cash flow came in at $14.83 million in Q2, representing a 3.3% margin. This result was great for the business as it flipped from cash flow negative in the same quarter last year to positive this quarter.
Over the last eight quarters, Hain Celestial has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 1.6%, subpar for a consumer staples business. However, its margin has averaged year-on-year increases of 5.2 percentage points over the last 12 months. Continued momentum should improve its cash flow prospects.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company's revenue growth was profitable. But was it capital-efficient? If two companies had equal growth, we’d prefer the one with lower reinvestment requirements.
Enter ROIC, a metric showing how much operating profit a company generates relative to its invested capital (debt and equity). ROIC not only gauges the ability to grow profits but also a management team's ability to allocate limited resources.
Hain Celestial's five-year average ROIC was 5.9%, somewhat low compared to the best consumer staples companies that consistently pump out 20%+. Its returns suggest it historically did a subpar job investing in profitable growth initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, over the last two years, Hain Celestial's ROIC has averaged a 2.3 percentage point decrease each year. In conjunction with its already low returns, these declines are a red flag and suggest the company's profitable investment opportunities are fewer than in the past.
Key Takeaways from Hain Celestial's Q2 Results
Hain Celestial largely missed on key lines this quarter, including revenue and EPS. Overall, the results could have been better. The stock is flat after reporting and currently trades at $11.34 per share.
Is Now The Time?
Hain Celestial may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for all companies serving consumers, but in the case of Hain Celestial, we'll be cheering from the sidelines. Its revenue has declined over the last three years, but at least growth is expected to increase in the short term. And while its projected EPS growth for the next year implies the company's fundamentals will improve, the downside is its declining EPS over the last three years makes it hard to trust. On top of that, its gross margins make it more challenging to reach positive operating profits compared to other consumer staples businesses.
Hain Celestial's price-to-earnings ratio based on the next 12 months is 24.4x. While the price is reasonable and there are some things to like about Hain Celestial, we think there are better opportunities elsewhere in the market right now.
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