Hain Celestial's Q3 earnings report, released Thursday, was a mixed bag that even CEO Mark Schiller couldn't put a shine on for investors.
The global organic and natural food manufacturer experienced strong sales in North America but faced challenges from increased inflation, ingredient and packaging shortages and effects of Russia's invasion of Ukraine—which is eroding European consumers' confidence, Schiller said.
"While these disruptions led to softer than anticipated results in the quarter, strong consumption and market share gains leave us confident in the underlying business health and long-term trajectory," he said.
Shareholders, however, had a different reaction. The stock closed at $33.57 per share on Wednesday; after the early morning conference call, it dropped to $27.61 per share by 10 a.m. EDT, just half an hour after the NASDAQ exchange opened. The sell-off continued Friday, with the share price hitting a 52-week low of $24.85 before closing at $25.22.
"Our primary priority has been and will be to continue servicing our customers, even if this impacts short-term profits to allow us to further build consumer trial and loyalty as well as strengthen customer relationships," Schiller said. "Despite industry-wide supply challenges, we're maintaining service levels in the 90% range, which is exceeding most of our competitors and allowing us to take share."
Hain is focusing on reducing ongoing costs, Schiller said. As part of that, the company will begin a restructuring, starting with a reassessment of the organization's design and resource allocation to accelerate growth, increase efficiency and effectiveness, and reduce costs. He gave an overview of five changes underway:
- Increase resources within the supply chain, purchasing, co-manufacturing and productivity to deliver additional cost reductions.
- Add resources to capacity planning to support growth categories.
- Eliminate the chief commercial officer role; other sales leaders will report directly to Schiller.
- Integrate the That's How We Roll brands to eliminate redundant roles and fill open positions in Hain Celestial.
- Right-size the company's infrastructure in Europe.
"While we'll provide more detail about the complete restructuring on the next call, we're confident these changes will make us leaner and more agile to address the short and medium-term inflation we are seeing, and more effective in driving our Hain 3.0 strategy," Schiller said.
North American sales high
Net sales growth in North America was the highest it's been in seven years, Schiller said—clarifying that he doesn't have a "complete archive of the company's reported earnings history."
"Digging into the reporting segments in North America, we saw strong momentum on the top line with consumption in the U.S. up 11% in the quarter—well above the industry average of less than 5% for branded food," he said.
For the third quarter in North America, the company reported:
- Net sales of $325.7 million, a 13% increase from Q3 2021. Adjusted net sales increased 9%.
- Gross profit was $75.2 million, a 4% decrease from a year ago. Adjusted gross profit was $77.1 million, a 6% decrease.
- Gross margin was 23.1%, a 420-basis point decrease from Q3 2021. Adjusted gross margin was 23.7%, a 480-basis point decrease.
- Adjusted EBITDA was $37.3 million, a 23% decrease from a year ago.
Overall Q3 financial results
The company's net sales increase was driven by North American sales growth and offset by international sales declines: soft store sales in the United Kingdom; loss of sales from a large, non-dairy, co-manufacturing account; and Hain's decision to discontinue shipments on select brands during a pricing dispute, Chief Financial Officer Chris Bellairs said.
For the third quarter, Hain reported:
- Net sales were $502.9 million, an increase of 2.1% from Q3 2021. Adjusted net sales increased 1.5%.
- Gross profit margin of 23.0%, a 340-basis point decrease from the prior year. Adjusted gross profit margin of 23.4%, a 400-basis point decrease.
- Operating income of $35.2 million compared to $49.6 million in Q3 2021, a 29% decrease. Adjusted operating income of $42.4 million compared to $59.7 million.
- Net income of $24.5 million, a 28.6% decrease from $34.3 million in the prior year. Adjusted net income of $29.7 million compared to $44.7 million.
- Adjusted EBITDA of $58.7 million compared to $73.8 million a year earlier.
- Adjusted EBITDA margin of 11.7%, a 330-basis point decrease compared to the prior year period.
- Earnings per diluted share of $0.27 compared to $0.34 in the prior year period. Adjusted EPS of $0.33 compared to $0.44.
During the third quarter, Hain repurchased 3.6 million shares—3.8% of its outstanding common stock—at an average price of $36.48 per share.
"While our top line was soft, most of the revenue issues within the quarter were driven by short-term factors that we believe will improve in Q4," Schiller explained, "although we expect short-term inflation and consumer confidence challenges to continue internationally." Hain has nine No. 1 or No. 2 share brands that will be well-positioned for growth when the economy stabilizes, he added. Of course, no one knows when inflation will ease; Hain has increased prices twice in North America and twice in Europe.
Raising prices was more difficult in Europe, as some retailers resisted the move. In turn, Hain Celestial stopped shipping to them until the retailers relented, Schiller said. The company lost four to five weeks' sales of several brands at numerous locations, but the problem won't be an issue in Q4, he said.
Company revises guidance downward
The company lowered its guidance, however, for the fourth quarter:
- Low to mid single digit adjusted net sales growth, supported by double digit growth in North America.
- Modest adjusted gross margin reduction.
- Adjusted EBITDA down low to mid single digits (including approximately 300 basis points of foreign exchange headwind).
For the year overall, the guidance also is revised:
- Approximately flat adjusted net sales,
- Modest adjusted gross margin reduction, and a
- Low double digit adjusted EBITDA decline.