'Pretty weak' trends at Hain as accounting probe drags on

Hain Celestial's pending accounting probe remains unresolved and now management is grappling with another headache — slowing growth.

"The real issue with Hain I think is less to do with accounting issues and more to do with the fact that the U.S. business was not doing well compared to prior periods," said Wunderlich Securities analyst Mitchell Pinheiro.

Hain's earnings per share growth in the past four out of five quarters has slowed to single-digits compared with a more robust double-digit compound annual growth rate in the past three years. And sales at its U.S. operations were weak in two of the last three quarters.

Moreover, analysts say Nielsen data since the accounting probe was revealed doesn't look encouraging for Hain. "They've been pretty weak," SunTrust Robinson Humphrey analyst William Chappell said of the latest trends data.

On Aug. 15, Hain announced an audit review was under way over the timing of revenue associated with distributor concessions. The company also delayed reporting fiscal 2016 results and missed full-year guidance.

"It's a little too early still to read too much into the delay," said Zain Akbari, an analyst at Morningstar. They are "looking at their accounting systems and practices pretty thoroughly. That can sometimes lead firms in unexpected directions."

Hain's last formal comment on the delay took place last month when it announced the company entered in a "limited waiver and extension" with a group of banks that would give it until Dec. 27 to file its financials. Prior to that, Hain said it received a letter from the Nasdaq Stock Market as a result of the company's inability to file its 10-K filing by Aug. 29, as required under the listing rules.

Hain also is the subject of several class action lawsuits in connection with the accounting issues and stock decline.

"It's kind of just a waiting game right now," said SunTrust's Chappell. "They have until the end of the year. The goal is much sooner than that."

Brands from Hain include Celestial Seasonings teas, Earth's Best organic food for babies and kids, Ella's Kitchen organic baby food, MaraNatha nut butters, Terra chips, Jason personal care products and Empire Kosher chicken, among many others. Hain declined comment for this story.

"It was a couple of not great quarters and the reason for that was a few different issues that they've been having operationally in the United States," said Akbari, the Morningstar analyst.

For one, Celestial Seasonings suffered from weak sales after it changed packaging in August 2015 but the division said last month it was bringing back the classic look.

Also, some big retailers have reduced shelf space to certain Hain's brands.

Piper Jaffray analyst Sean Naughton said last week in a research note that Target added three seasonal offerings of Hain's Celestial Seasonings line to stores but indicated that was still below the number of Hain stock-keeping units, or SKUs, from a year ago.

"Hain continues to see pressure in the baby aisle with new competitors and Ella's out of [Wal-Mart] stores now," said Naughton. Hain's biggest customer on a global basis is Wal-Mart Stores and domestically it is Whole Foods.

Hain acquired Ella's Kitchen, an organic baby food brand, in 2013. The brand is facing pressure winning and maintaining retail shelf space from baby food competitors such as Campbell Soup's Plum and Beech-Nut, part of Swiss food company Hero AG. In May, Hain's CEO indicated Ella's was the No. 1 organic baby food in the U.K., but Earth's Best baby food was tops in the U.S.

There also was a report from another research firm that Costco may have trimmed some Hain SKUs from their stores. Costco wasn't immediately available for comment.

In its fiscal third quarter ending in March, the last financial period the company reported, it blamed a decline in U.S. sales in part on "temporary disruptions from some of our distributor and retail customers." About 60 percent of the company's business comes from the U.S.

Meantime, Hain's stock has lost more than a third of its value since the accounting issues were announced. The stock was recently trading down 11 cents, or 0.3 percent, at $35.39.

Some analysts still have "buy" ratings on the stock and suggest it should be trading higher based on its brand values. They also indicate Hain — with a market capitalization of about $3.7 billion — may be an attractive merger or acquisition target.

"The brands are worth considerably more than currently valued," said Wunderlich's Pinheiro, who is in the bullish camp. "It's sort of a value play with [the key to] unlocking it being the M&A. They are more sellable now than before."

That said, Pinheiro doesn't expect anything will happen prior to Hain releasing its audited numbers.

Five big consumer packaged good companies are often mentioned by analysts as potent suitors for Hain: Campbell Soup, J.M. Smucker, Kellogg and to a lesser extent Nestle and General Mills. They indicate that the big packaged food companies are hungry for growth and acquisitions in the organic and natural products space and are either flush with cash or have the balance sheets to support a transaction.

Spokespersons for Campbell Soup, Nestle, General Mills and Kellogg said the companies had no comment.

"A larger-scale traditional packaged foods firm may well look to Hain as an acquisition target just because there are so many distribution-related wins possible," said Akbari. "Once these accounting issues resolve themselves, you could see some renewed momentum on that side."

Morningstar has a "fair value estimate" on Hain stock of around $45, which would represent a nearly 27 percent increase from Monday's closing price. While the analyst said the price target is a "meaningful premium," it's still a discount to where the shares were trading prior to the accounting issues.