Rise in consumption, innovative marketing and expanded distribution facilitated The Hain Celestial Group Inc. (HAIN), which distributes, markets and sells various natural and organic foods as well as personal care products, to register historically highest sales and EPS numbers.
The second-quarter earnings of 52 cents a share came ahead of the Zacks Consensus Estimate of 49 cents, and jumped 33.3% from 39 cents delivered in the prior-year quarter.
However, on a reported basis, including one-time items, earnings came in at 44 cents compared with 37 cents a share earned in the year-ago quarter.
Consumption Drives Topline
Rise in demand for natural organic products proves to be boon for the company as revenue in the quarter rose 32.1% to $385.6 million from $291.9 million delivered in the prior-year quarter. Moreover, the results were backed by healthy performances of United States and Canadian operations as well as its recent acquisitions.
However, the company’s reported revenue fell marginally short of the Zacks Consensus Estimate of $386 million.
The company noted that consumption in the U.S. grew 7%, which is a good number in these turbulent times, with a 9% growth witnessed in its top line.
The company registered increased consumption in core categories with robust contribution from Earth’s Best, Celestial Seasonings, MaraNatha and The Greek Gods, to name a few. Hain Celestial also experienced solid sales across recently acquired brands.
Margins – Areas to Improve
Gross profit rose 23.6% to $105.5 million in the quarter compared with $85.4 million the prior-year quarter. However, the happiness over a rise in profit fades away as we look at the margins.
Cost of sales as percentage of revenue increased approximately 190 basis points, thus taking a toll on gross margin numbers. Gross margin contracted by almost 190 basis points during the quarter to 27.4% as the favorable product mix and productivity savings were more than offset by higher input costs.
Adjusted operating profit jumped 32.1% to $40.1 million in the quarter, while adjusted operating margin remained flat at 10.4%.
Going forward, we believe that the company will be able to mitigate cost pressures through increasing productivity and efficient pricing.
Moreover, Hain Celestial has undertaken a number of initiatives to improve its performance and has put itself on the growth trajectory. The company’s Stock Keeping Unit (“SKU”) rationalization program has helped to eliminate SKUs, which had lower sales volume or weak margins. Management focuses on improving profitability through new product introductions while reducing costs.
Financial Aspects
The company ended the quarter with cash and cash equivalents of $23.9 million, long-term debt of $450.4 million and shareholders’ equity of $895.6 million. Operating free cash flow increased 21.3% year over year to $72.3 million for 12 months ended December 31, 2011.
Guidance Reiterated
Hain Celestial stood by its earlier projection and expects revenue between $1,455 million to $1,480 million and earnings in the range of $1.63 to $1.73 per share for fiscal 2012. The analysts considered by Zacks expect earnings of $1.69 for fiscal 2012.
Investment Outlook for 2H12
For the second half of fiscal 2012, the company expects to sustain the strong momentum across entire business segments as it remains well positioned to capitalize on the growing global demand for organic products.
Moreover, Hain Celestial completed the acquisition of U.K. based marketer and manufacturer of fresh and frozen foods, Daniels Group, which is expected to amplify the sales of the company as it provides a gateway to a sturdy food and grocery market that is swiftly gaining ground.
The frozen category represents more than 50% of food sales in U.K. Further, the company plans to spread out the supply of certain Daniels brands through the rest of Europe with the expertise of Daniels’ strong management team.
Acquisitions have been a key part of Hain Celestial’s strategy to build market share. These acquisitions have not only widened the company’s geographical presence, but have also provided opportunities to cross-sell products in the U.S., Canadian and European markets. The company is eyeing vibrant markets like Australia and Middle East for future expansion.
Currently, we have a long-term Outperform rating on the stock. Hain Celestial, which competes with General Mills Inc. (GIS) and Kraft Foods Inc. (KFT), holds a Zacks #2 Rank, which translates into a short-term Buy rating.
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