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Hain Celestial reports decreases in sales, gross margin and income

New CEO says company has too many SKUs, is losing distribution, but he remains optimistic.

Hain Celestial Group saw sales drop 5 percent to $584.2 million in the second quarter of FY2019, the worldwide natural products company announced Thursday.

“Today’s news on our current performance is truly disappointing,” said CEO Mark Schiller in Thursday’s earnings call. “We have issues that need fixing and we have decisions that need unwinding.” Schiller stepped into his position at Hain Celestial in November after eight years at Pinnacle Foods Corporation.

The company has too many unprofitable SKUs because it added too many products that didn’t add growth, he continued. The company has lost shelf space as well as distribution—and it will continue to lose distribution.

In addition, the company previous made decisions regarding investments and prices that focused on “volume at any cost,” Schiller said, instead of profit.

“The good news is that these issues are largely self-inflicted and our recovery is predominantly under our control,” Schiller said. “We have a great business, with great potential.” Already, the company has significantly reduced its inventory, reduced some costs and improved service, and he expects to see improvement in the second half of the fiscal year, he said.

Inventory in January was $25 million less than peak inventory levels in August, James Langrock,  executive vice president and chief financial officer, said.

“We envision a smaller, more focused company with higher margins and profits,” Schiller said. “That’s a fundamentally different approach for Hain. … Going forward, we will be smaller, less complex and more efficient, resulting in higher margins and profits.”

Elaborating on that, Schiller said Hain Celestial has been “treating all brands, customers, opportunities the same” and creating initiatives that don’t result in the value the company was seeking. The team is now evaluating which products have the potential for the most growth or the highest profit and which brands need to be supported more to reach their potential. Then the company can focus on the core SKUs to drive growth and profit for itself and its retailers.

Hain Celestial has 55 different brands, but it can’t grow all of those brands, Schiller said. The core brands and categories are tea, personal care, snacks and yogurt—and those are in a good position to be successful.

“The things that are growing nicely, we’re going to continue to invest in and those are going to continue to grow nicely,” Schiller said. The company is adding people, marketing funds and other resources to those brands, while looking to eliminate products and activities that don’t generate profit.

Worldwide, the company reported losses across the board:

  • Net sales decreased 5 percent from Q2 2018 to $584.2 million, or a 4 percent decrease on a constant currency basis. Adjusted net sales decreased 1 percent.
  • Gross margin was 19.6 percent, a 210 basis point or 2.1 percent decrease from Q2 2018. Adjusted gross margin was $118.6 million or  20.3 percent, a 240 basis point or 2.4 percent decrease.
  • Operating loss of $15.4 million, compared to operating income of $31.0 million in Q2 2018, a decrease of 149.7 percent. Adjusted operating income of $29.9 million, compared to $49.5 million.
  • Net loss of $29.3 million, compared to $53.3 million in Q2 2018, a 32 percent drop. Adjusted net income of $15 million, compared with $33.6 million.

The decrease in adjusted gross profit was offset by savings from Project Terra, Langrock said.

Project Terra, launched in 2016, is designed to cut costs, increase productivity and generate $100 million in savings. The company set a goal to focus on and invest in its top 11 brands and 500 SKUs.

Former CEO Irwin Simon said in August that Project Terra generated $63 million in savings during fiscal 2018. The company said then that it expects to see $90 million to $115 million in savings during fiscal 2019.

This quarter, Project Terra reduced costs $21 million, Langrock said. He expects total savings this year will be “at the lower end” of the prior projection, as some savings are taking longer to realize, he said.

U.S. sales and operating income also decreased compared to Q2 2018, mostly because of lower sales in the Pantry and Better-For-You Baby brands but offset a bit by increases in Better-For-You snacks.

  • Net sales decreased 4 percent from Q2 2018 to $259.2 million. Adjusted net sales dropped 1 percent.
  • Operating income was $7.2 million, down 67 percent from Q2 2018. Adjusted operating income was $13.4 million, a 57 percent decrease from $31 million.
  • Adjusted gross margin was 20.1 percent, an increase of 150 basis points or 1.5 percent from 18.6 percent in Q1.

In total, year-to-date, Hain Celestial’s net sales have decreased 5 percent from a year ago. It has a net loss of $52.38 million for the first six months of fiscal 2019.

The company also updated its annual guidance for this year, projecting net sales of between $2.32 billion and $2.35 billion, 4 to 6 percent lower than 2018. In August, Langrock said the company expected net sales for fiscal 2019 to total between $2.5 billion and $2.56 billion, an increase of 2 to 4 percent from 2018.

 

This story was updated with additional information about 1 hour after its original posting.

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