Sales were up but profit was way down for The Hain Celestial Group during the company’s 2009 fiscal second quarter, the company reported February 4. Sales for the quarter, which ended December 31, 2008, increased 14.2% to $315.6 million. Net income slipped significantly, however, with the company reporting a 48% decline from $16 million to $8 million for the quarter.
Hain cites inventory reductions, high grain costs associated with the Hain Pure Protein division and the lag in fully realizing price increases implemented in August as reasons for the loss of profit. Gross profit margin also took a dive, from 28.7% for the fiscal 2008 second quarter to 23.4% for the 2009 fiscal second quarter. Cost of sales and administrative expenses cut into the company’s margin, as did a disappointing performance in the United Kingdom. Net sales for the six months ended December 31, 2008, grew 16.8% to $605 million, while gross profit margin was down four percentage points to 24%.
Analysts with Argus Research, an independent research firm, downgraded Hain’s stock rating from a buy status, to a hold, upon the release of the Q2 earnings. “We downgraded Hain to hold as we expect the weak economy to catch up with Hain’s sales and earnings,” Argus noted in a release. “Thus far in the recession, Hain has reported strong sales growth, while earnings have only been hit by cost inflation. However, Hain’s recent price increases and the slowdown in consumer spending may ultimately lead consumers shifting to lower-priced alternative products, hurting the company’s sales.”
I view the downgrade of Hain’s stock as a clear indicator that the effects of the consumer downturn are finally impacting the nutrition industry and the natural & organic segment. Last week, NBTY, the largest supplement manufacturer in the United States, announced that its profit margins were down 8% for its 2009 fiscal Q1. Now Hain, one of the largest manufacturers in the natural & organic food and personal care markets, has seen a hit in its profit and is beginning to lower its 2009 earnings guidance ($1.38 to $1.42 per share). The extent to which Hain’s earnings are affected over the next two fiscal quarters should be a good indicator as to how much consumers are willing to pay price premiums for natural & organic products in the face of an extended recession. Just as Whole Foods is a bellwether retailer for the industry as a whole, and NBTY acts as a gauge for supplement manufacturers, so too does Hain for manufacturers in the natural & organic space. Stay tuned for Q3 and Q4 updates.