Hain Celestial Group Inc (NASDAQ:HAIN) stock is collapsing this morning – down around 27 percent at the time of this writing. While that is a lot for a company even with a few million dollar market cap it is rare for a company with a (now) size of around $4 billion. The reason? Accounting issues – so is it serious or not? Well if you believe the sell-side (and maybe you should not) although in general the analysis is great even if conclusion is not IMHO, it seems somewhat serious so they are cautiously optimistic (JK – but without even reading i will beat they use some generic line like that). Anyway, all the analysts are playing catch up and downgrading the stock – see the analysis below.
Hain Celestial Group Inc (HAIN) Collapses – Analysts React
What happened? After today’s market close, the company announced that it will delay its fiscal 4Q and full-year 2016 earnings results. This delay is due to uncertainties around 1) revenue recognition associated with certain concessions that were granted to US distributors in 4Q and 2) internal control over financial reporting. Independent counsel will be assisting the Board’s Audit Committee in an independent review. The company did not provide an estimated date of its release, and believes that it will not be in a position to do so until the completion of the independent review process. Separately, the company also announced that it does not expect to meet its full-year 2016 guidance of net sales between $2.946B and $2.966B (RBCe $2.965B; +10% YOY), and adjusted diluted EPS of $2.00 to $2.04 (RBCe $2.01; +7.5% YOY).
We are suspending our rating and target price on Hain until these financial issues are resolved.
In a separate issue, but also filed in Monday’s release, HAIN said that it would not achieve its previous FY16 guidance. In the company’s last FY2016 investor update (5/04/16) Hain guided to net sales of $2.946-$2.966bn and to adj EPS of $2.00-$2.04. But since Hain’s May update, US consumer takeaway has trended below F3Q sell-in (per Nielsen) and currency headwinds have intensified post the UK vote (UK = ~28% of Hain sales). As such, we are lowering our F4QE sales to $470m and adj EPS to $0.53 (Street: $0.60), and fiscal 2016E sales to $2.93B and adj EPS to $1.95 (Street: $2.03). For fiscal 2017 EPS we are forecasting EPS below Consensus at $2.05 (vs Street: $2.25).
The company’s press release left the door open for a number of possibilities. The more optimistic investors we spoke with last night say it is possible that a) the only accounting error Hain committed was
assigning revenue to the incorrect period, and b) FY17 estimates may not have to drop very far. Their less optimistic counterparts ask what happens if a) Hain’s evaluation of its financial reporting controls turns up additional problems, and b) FY17 needs to drop by more than expected. No matter what, our experience tells us that the market tends to have a particular distaste for uncertainty; thus, until the issues of accounting and guidance are cleaned up (and, of course, we don’t know when this will happen), the stock could be in the penalty box.
While the lack of adequate internal financial controls is disappointing, it is unlikely to impact HAIN’s leading position in the attractive health & wellness sector. Annie’s (BNNY) faced similar issues related to the timing of its trade promotion/spending in 1Q14. However, after an initial 20+% decline, BNNY recovered within 30 days, before being acquired by GIS at an attractive valuation.
While we are not yet changing our estimates, we provide a sensitivity analysis (p. 3) of a potential, albeit unlikely, sales/margin impact from the audit review. We estimate every $25 million sales impact may pressure HAIN’s full-year EBITDA and EPS by $8 mm and $0.05, respectively, assuming incremental EBITDA margins of 30% on lost sales.
This issue is likely to take several months to resolve, as such we expect the stock to underperform medium-term and especially if it is revealed that the SEC is involved (it could already be involved). Although the company went out of its way to say the issue is timing related, there is the possibility of material restatements.
HAIN identified distributor concessions in 4Q16 (UNFI is 12% of sales, but not called out specifically) and is reevaluating if revenue timing association for concessions granted are correct (should have no impact on ultimate revenue recognition, simply timing). We note both the CFO (last fall) and CAO (February 2016) left HAIN this year. Historically we’ve covered two companies with\ notable account questions raised in the last ~6 years, GMCR and DMND (private and sold to LNCE). Generally, uncertainty around internal controls and financial statements may take at least 6-12 months to subside, with limited support from value investors initially. GMCR traded in the low-teens on a forward P/E at best