Food & Beverage

Redemption day around corner as Hain's delayed financials, probe update due out Thursday

Key Points
  • Hain disclosed accounting issues last August and hasn't reported financials in more than a year.
  • The natural and organic products supplier is the subject of an ongoing SEC probe for its accounting practices.
  • Hain's stock price has been weak since accounting issues were disclosed, and the Amazon-Whole Foods deal also pounded shares.
Source: Celestial Seasonings

Bruised natural and organic products maker Hain Celestial will get a chance to redeem itself on Thursday when it releases long-delayed financial results and provides an update on an accounting probe.

"They haven't reported numbers for over a year now," said Maxim Group analyst Anthony Vendetti. "Although we continue to see value in Hain's core businesses, we would not initiate new positions as we are still in the dark about its revenue recognition issues and there remains potential for financial restatements."

Back in August, Hain delayed its fiscal 2016 results, missed full-year guidance and also announced potential accounting troubles stemming from revenue-recognition timing issues. The last time it reported financial results was back in May 2016.

Hain's stock sank 27 percent on Aug. 16, 2016, when the accounting issues were disclosed. It has since fallen another 16 percent, and the company has disclosed it's also the subject of a Securities and Exchange Commission investigation and is cooperating with the regulatory agency.

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In after-hours trading Wednesday, Hain shares were trading up more than 2 percent at $33.93.

Hain's stable of brands includes Celestial Seasonings, Terra Chips and Garden of Eatin, among others. Its products are carried at major retailers, including Wal-Mart Stores, Whole Foods and Sprouts Farmers Market.

Vendetti, whose firm has a hold rating on Hain, said during an interview this week that after the accounting issues were disclosed "we reduced our estimates and said let's move to the sidelines. We thought that was the prudent thing to do — to take a wait-and-see approach."

Indeed, seven out of the 11 analysts covering the stock have a hold or reduce rating on the stock, according to Thomson Reuters.

At the time Hain disclosed the accounting issues, the company said it had "identified concessions that were granted to certain distributors in the United States." It added that it was "evaluating whether the revenue associated with those concessions was accounted for in the correct period and is also currently evaluating its internal control over financial reporting."

As part of its probe, Hain also said last August that the audit committee of its board had retained independent counsel to assist in the review.

On May 11, though, the company said it expected to file its financial results by the end of the month and indicated at the time its "internal accounting review is nearing completion." But Hain didn't file its results and instead issued a press release May 30 announcing it needed until mid-June.

Hain is scheduled to report before the bell Thursday its delayed fiscal 2016 results as well as quarterly financials for the first three quarters of fiscal 2017. The company also has stated it expects to make the required regulatory filings in connection with those financial results.

"At this point it's just a matter of trying to get some sense of what's been going on in the business," said Zain Akbari, an analyst at Morningstar. "It's been so long since we've seen financials that I think a resetting of where exactly the firm is and where it's going, in addition to what steps they are taking to ensure that this sort of an incident doesn't recur will be important."

Akbari pointed out that even before the accounting mess hit the headlines there were concerns at play with Hain's business slowing in the U.S. Some of the problems were self-inflicted, he said, such as the company's Celestial Seasonings tea brand's packaging refresh that "didn't go so well. It will be important to see how the product responded in the next tea season."

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Moreover, the Morningstar analyst said a broader operational update will be important as well as an update on streamlining steps that were taking place. "That certainly feeds into what we're hoping to see from a margin standpoint, which is a bump in profitability as they try to really refocus on operating their assets as well as they can."

Then again, UBS analyst Steven Strycula said in a note Monday that the past several weeks have proven to be newsworthy not just because of Amazon's recent announcement that it will acquire Whole Foods but because of a "deceleration in U.S. scanner trends" as well as more private-label competition at the grocery store.

"While Amazon is likely to help drive traffic to Whole Foods stores, risk exists that [Amazon] could shrink center of store size over time and push more assortment to a greater private label mix," said the UBS analyst. (The center of the store is where name-brand consumer packaged goods are typically located.)

As for Hain's share price outlook, Strycula said the open SEC investigation and deceleration in grocery trends domestically "could limit the stock's ability to rebound" to prior levels.

Meantime, Morningstar's Akbari said Hain's stock "could move materially depending on the content of those [outstanding financial] reports – to the good or to the bad."

Added Akbari, "I think that there's likely to be a natural uplift with just the fact the company will have numbers out there. The elimination of that uncertainty is a natural positive. Real proof will be in what exactly is contained in those reports."

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