Even With a Leadership Change on the Horizon, Hain Celestial Stays Anchored to Long-Term Strategy

Associate Equity Analyst

Ari Felhandler

Hain Celestial was arguably ahead of its time when it was established in 1993 as a pure-play consumer product company in the natural and organics space. But a long string of acquisitions resulted in a complex company that operated in disparate categories, spreading resources thin. Hain's brand investments were dwarfed by those of its peers, resulting in labels with minimal consumer awareness and innovations that fell flat. 

In fiscal 2019, Mark Schiller was appointed CEO to stabilize the business. His turnaround strategy was focused on simplifying the portfolio (largely accomplished), strengthening capabilities (innovation, marketing, productivity, pricing), expanding margins, and reinvigorating growth. With new CEO Wendy Davidson taking the reins Jan. 1, we don't foresee imminent changes to the firm's strategic direction, as there is evidence that Hain’s initial actions are bearing fruit. Cost savings have allowed the firm to increase brand investments to be in line with peers, with returns on these investments improved. Hain’s focus brands grew at a high-single-digit pace in the first few months of fiscal 2020 before the pandemic-driven pantry-stocking surge began, a marked improvement from fiscal 2019’s 2% decline. As these revitalization efforts continue to take hold, we think Hain will ramp up to 7% annual organic sales growth by fiscal 2025, finally keeping pace with its categories. We think Hain also has the potential to increase its profit margins as it integrates the previously acquired businesses, realizes benefits from a shift to higher-margin products, divests low-margin businesses, and rightsizes overhead expenses after divesting nearly 20% of its sales.

Despite this progress, we do not believe Hain has secured a moat via brand equity, entrenched retail relationships, or a cost advantage, as its brands continue to be relatively niche and it faces higher structural costs from operating in the health and wellness channel. 

Hain is an attractive acquisition target for a firm looking to increase its exposure to the fast-growing natural and organics categories. We think an acquirer could currently value Hain at 2.5 times fiscal 2023 sales, or $43 per share.

Business Strategy & Outlook

We do not believe that Hain Celestial has secured a durable competitive advantage, even though its portfolio of better-for-you products is very much on trend with consumers. The most likely sources would be intangible assets (brand equity, preferred relationships with retailers), or a cost advantage. Our analysis indicates that the firm has fallen short in each pillar.

Historically, Hain had many brands across many disparate categories, which spread company resources too thin, causing underinvestment in brands. This has resulted in a lack of brand equity and pricing power. Unlike most companies that focus on either food and beverages or personal care, Hain has elected to play in both. Hain can be found in nearly every aisle of the grocery store, participating in such dissimilar categories as yogurt, chips, tea, condiments, cereal, frozen food, meat alternatives, baby food, diapers, shampoo, toothpaste, and sunscreen. Since 2019, Hain has been narrowing its focus to its most promising categories and brands, where it has a differentiated offering. Even so, we believe historical underinvestment has limited consumers’ awareness of the firm’s brands and manifests itself in lackluster brand equity and pricing power. Until recently, we estimate Hain spent 2.2% of revenue on marketing, compared with a 4.6% average for packaged food peers. Furthermore, Hain management has acknowledged that historically, brand investments have not been strategic or efficient, as investment dollars were broadly allocated across its brand portfolio without regard for expected return on investment. In addition, Hain invests less in research and development than its peers. Prior to Schiller's 2019 arrival, Hain spent about 0.4% of revenue on R&D, compared with 0.8% for its competitive set. We believe these factors have contributed to Hain’s lack of a competitive advantage via strong brand equity. The company's restructuring efforts are addressing these challenges, as Hain has been divesting noncore brands and more judiciously allocating its marketing and R&D resources to the most promising products. In the last few years, Hain has narrowed its underinvestment gap, investing 4.4% of sales in marketing by our estimate in 2022, and 0.5% on R&D, and we think in the next few years Hain's marketing and R&D investments will come in line with peers, at nearly 6% of sales combined. But it will take time for consumers to become familiar with (and potentially loyal to) these brands.

Of Hain’s 30-plus brands, eight (according to Euromonitor calendar 2021 data) hold top-three market leadership positions, all in the United Kingdom. Ella's Kitchen baby food and New Covent Garden chilled soup boast top spots, Linda McCartney plant-based meats, Yorkshire Provender chilled soup, Hartley's fruit spread, and Sun-Pat peanut butter hold number-two positions, while Gale's honey and Robertson's fruit spread come in at number three. In the United States, Hain does not hold any top-three positions, but it holds the number-four brand of baby food with Earth’s Best, which has 4% share. This is dwarfed by Enfamil, Similac, and Gerber, which hold 24%, 23%, and 21% shares, respectively. In hot tea, Celestial Seasonings holds the number-eight position with 3.1% share, which is significantly smaller than market leader Lipton’s 10.9%. However, as many of Hain’s products are natural and organic, which currently represent only about 10% of overall food and beverage sales, it is understandable that the company would not have dominant shares. We believe that as natural and organic products become a greater portion of the overall mix, Hain’s brands have potential to gain share of their respective categories. Natural and organic product sales are growing around mid to high single digits annually, while the overall food and beverage market grows about 2%. Therefore, we think the category can approximate a mid- to high-teens level of domestic food and beverage sales over the next two decades. Consumers maintain a ferocious appetite for better-for-you products and have exhibited a willingness to pay a premium for them. Food producers are happy to provide opportunities for consumers to trade up, launching more products with better-for-you attributes. Retailers have been accommodating the growth as well, allocating more shelf space to these offerings.

Even after accounting for its more negligible share position at present, we would’ve expected Hain’s positioning in the natural and organic aisle to result in price premiums, but this has not played out. At its 2019 investor day, Hain indicated that in the U.S., it had the fourth-worst price realization of 21 industry-leading firms, showing that its prices were essentially flat over the past year while most peers had increased prices. We expect firms with powerful brands to be able to raise prices commensurate with raw material inflation. Hain’s inability to do so supports our stance that it has failed to carve out an edge. 

Although Hain’s unique position as a long-standing pure play in better-for-you products could provide the company with valuable insights to share with its retail partners, we don’t believe this has been sufficient to promote the firm to strategic partner status. Furthermore, as conventional players move more aggressively into the natural and organic space, they are also building their expertise, making Hain less unique in that regard. For Hain to gain a competitive edge through established retail relationships, we believe it would have to have market-leading positions in categories that represent a material portion of retailer revenue or in categories that represent high growth or high margins for the retailers. While the fast growth of natural and organic products creates potential for Hain to elevate its standing with retailers, we believe its current market positions are too small for the company to be considered a strategically important partner at present. While Hain management has said it has more SKUs in Whole Foods than any other company, we believe this is more reflective of its product breadth than of store dominance. Our store checks indicate that Whole Foods is reserving the best shelf space (both physical and virtual) to highlight its private-label brand, 365 Everyday Value. Furthermore, only a portion of Hain’s revenue is sold directly through its own salesforce. As the firm’s products are distributed across a vast network of natural foods supermarkets, independent natural retailers, and specialty stores, a significant portion of its revenue is sold through brokers and distributors. In fact, one of Hain’s largest customers is a distributor, United Natural Foods. While we believe this approach is prudent, it limits the competitive advantage the company can earn by becoming a strategic partner with its retailers, earning privileged distribution rights.

We believe Hain does not benefit from a cost advantage, as its large number of brands, categories, and channels has not produced a scale advantage. We believe Hain’s participation in broad categories has resulted in inefficiencies and higher costs. First, because the firm competes across food, beverage, and personal-care categories, it has a broader, more complex list of raw materials and manufacturing processes than its peers. Second, its exposure across shelf-stable, refrigerated, and frozen categories adds complexity and cost to the supply chain. Third, we don’t believe the firm is large enough to have amassed negotiating leverage with suppliers and vendors, whether purchasing goods (raw materials, packaging) or services (distribution, advertising). Finally, the broad number of channels that the firm operates in adds expense and complexities to the cost structure. Hain distributes its products to traditional grocers, mass, club, drug, convenience, and food-service operators, as well as specialty health stores and natural foods supermarkets. Hain contracts with brokers and distributors to help service these clients, which we believe is prudent, but does not help the company maintain a cost advantage. We believe evidence of a cost advantage can be found in either superior market shares or superior margins, but Hain has not secured either. It maintains a market-leading position in only a handful of its categories in the U.K. and none in the U.S., two markets representing 81% of its revenue. Hain’s operating margins averaged 8% over the past three years, compared with 17% for its packaged food peers. Hain’s margins are significantly lower than peers even though the company invests less in advertising and R&D. Hain’s gross margins are below its peer average as well; despite increasing to 23% last year from 21% in fiscal 2019, this still lags the 35% average for the peer group. While we expect Hain's gross margins will improve to 30% over time as it transitions from a decentralized holding company to an integrated operating company, we think its material exposure to higher-cost channels, such as specialty health and wellness, is likely to keep a cost edge at bay.

The inability to consistently report economic profits (returns on invested capital in excess of our estimate of the firm's cost of capital) supports our contention that Hain does not possess a moatworthy competitive advantage. In the past five years, Hain reported economic losses four times, reporting ROICs including goodwill ranging from 4% to 8%, compared with our 7% estimate of its cost of capital. We expect ROIC will improve, given the firm's aggressive restructuring efforts, with the company reporting consistent economic profits in fiscal 2025 and beyond.

None

Economic Moat

Hain Celestial Group

The Hain Celestial Group, Inc. engages in the production and distribution of organic and natural products. It operates through North America and International geographical segments. The North America segment consists of the United States and Canada. The International segment includes United Kingdom, Ella’s Kitchen UK, and Europe. The company was founded by Irwin David Simon on May 19, 1993, and is headquartered in Lake Success, NY.

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HAIN reports Q1 earnings decline but focuses on EBITDA growth

HAIN reported a decline in adjusted net sales but highlighted growth in specific categories and brands. The company is focused on addressing challenges in certain segments and leveraging opportunities for EBITDA growth and debt reduction.

Hain Celestial Group Reports Solid Q4 Performance Amid Consumer Behavior Challenges

Hain Celestial Group's Q4 performance was solid, with notable strengths in specific product categories and regions. However, challenges related to consumer behavior and internal changes exist. Looking ahead, the company sees opportunities in portfolio growth, brand building, and addressing shifting consumer demographics.

Hain Celestial faces challenges but sees opportunities for growth

Hain Celestial faced challenges in baby formula supply and net sales decline, but observed positive momentum in key brands and categories. The company aims to reduce balance sheet leverage and reaffirms full fiscal year guidance. Opportunities lie in the recovery of International markets and the expected lift in performance in the upcoming quarters.

Hain Celestial reports sequential improvement in Q2 performance and bullish on nonmeasured channel expansion

Hain Celestial's Q2 performance showed sequential improvement and strength in various segments, driven by the Hain Reimagined strategy. While facing challenges such as supply shortages and margin refinement, the company is optimistic about expanding into nonmeasured channels and expects organic net sales growth for the full year. Overall, the company is pleased with the progress made in the foundational year of its strategy and is excited to pivot to growth in the back half of the year.

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The Hain Celestial Group, Inc. engages in the production and distribution of organic and natural products. It operates through North America and International geographical segments. The North America segment consists of the United States and Canada. The International segment includes the United Kingdom, Ella’s Kitchen UK, and Europe. The company was founded by Irwin David Simon on May 19, 1993 and is headquartered in Hoboken, NJ.

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