Hain Shares Drop 20 Percent After Disappointing 1Q

Hain Shares Drop 20 Percent After Disappointing 1Q

UNIONDALE, N.Y.--The Hain Celestial Group (NASDAQ:HAIN) reportedresults for its fiscal 2001 first quarter ended Sept. 30, including earningsthat undershot Wall Street expectations. Earnings for the period reached $6.4million or $.19 per share, a marked improvement from $5 million or $.20 pershare lost in the comparable quarter last year, but lower than the $.28 pershare expected by analysts. Top line growth was only seven percent, as revenuesincreased to $93.7 million from $87.9 million sold a year ago. Gross marginclimbed five points and selling, general and administrative costs fell as apercentage of sales, but merger costs and other one-time issues cut into thebottom line.

Company management reported that the results were affected by costsassociated with the May 2000 Hain Foods-Celestial Seasonings merger, primarilyrelated to employee issues. Also, certain inventory issues involving Celestialtea products and a reportedly less than ideal mix of tea products reachingretail shelves added to earnings-eating culprits. Among the other issues citedby Hain as factors in the unexpected earnings shortcoming were precautionaryactions by the company in response to a potential labor dispute at its Irwindale,Calif.-based plant, a change in billing to major customers, and millions ofdollars in unshipped orders that clogged the end of the quarter. Fuel surchargesalso added up to a significant reduction in operating income.

Irwin Simon, chief executive officer, explained that these issues are beingaggressively addressed. Management stated that the labor situation at itsIrwindale plant will soon be resolved; shipping issues are being attended to;fuel surcharges are being factored into pricing; and the Celestial business isbeing aggressively revitalized.

"As we mentioned last quarter, we began to evaluate and institutechanges to improve the focus and processes at Celestial Seasonings, first andforemost, by making significant management changes," Simon said. "Overthe past several weeks, this experienced new team has conducted an extensiveevaluation of how we can better execute our fundamental strategy of buildingCelestial Seasonings into a more profitable brand that meets the significantlyincreasing demand for tea through more effective marketing, product informationand distribution efforts." In effect, Simon explained that the companywould clean up distribution channels and reduce the inventory of tea in thesystem. Management also reported that it would try to improve the herbal teabusiness. Simon vowed to spend more money to get the right tea products on theshelves. "We have to strike while the iron is hot," he said andexpressed confidence that the Celestial business will turn around in the comingquarters. For the first quarter, revenues from Celestial were reported at around$20.7 million, down considerably from about $35 million in sales reported forCelestial for each of the last two quarters closed before it merged with Hain.

On the upside, the company reported that certain Hain products wereperforming very well and making good gains. According to rounded figuresreported in its Nov. 10 conference call, the Terra brand was up 34 percent,Westsoy brand products were up 24 percent, Earth's Best brands were up 21percent, bar products were also up 21 percent, and cereals in natural foodsmarkets were up 27 percent. Health Valley products were flat for the quarter butwould have grown 7 percent if all orders placed before the quarter closed hadbeen shipped. Celestial's shine was green tea, which charted a 47-percentgrowth, thus making it a target area for the company's expansion. While growthin these brands is still strong, the current growth figures were belowcomparable figures logged a year ago, with some amounts far below comparable1999 amounts.

News of the quarter's earnings disappointment sent HAIN shares downward,falling around 20 percent to just under $24 per share on Nov. 10, the report'srelease date. For some analysts, the results meant that industry leader Hain isnot immune to the slowing growth of the overall industry. Carole Buyers, ananalyst with Tucker Anthony Capital, lowered HAIN to Buy from Strong Buy basedon the slowed growth and planned increased spending. She also reported thatincreased competition in key categories, including soy milk, is forcing Hain tojoin its competitors in spending more money to gain distribution and shelfspace. However, she noted that Hain is still the industry's best-positionedcompany and remains a strong target for acquisition. Speculation of possibleacquisition has been increasing since the natural food industry underwent aperiod of consolidation and acquisition by major food companies and grewimmensely when Heinz bought a 19-percent stake in Hain earlier this year.

Buyers contended that Hain would trade at a premium due to its position inthe industry, its exceptional cash flow and potential for distribution gains.Her estimates show that Hain would likely go for between $35 to $45 per share,based on current and expected figures. Hain management would not speculate onany possible acquisitions but did mention that if consolidation was the best wayto grow and gain distribution, while offering the best shareholder value, thensuch actions would be considered.

For more information on Hain Celestial's report, visit www.hain-celestial.com.