Hain Celestial Group, Inc. (HAIN) has steadily climbed for the last several years, advancing about 240% since the end of 2011. The large-cap issue’s stellar performance has been underpinned by the steep growth trajectory of the natural/organic food segment, which has been expanding at a much faster pace than its conventional packaged food counterpart. Indeed, U.S. retail sales for the natural/organic sector are estimated to reach $60 billion by 2017, five times the $12 billion recorded in 2000. This translates to a CAGR of approximately 10%, compared with about 1% for the broader packaged food industry.
As more consumers have shown an appetite for natural/organic food, distribution has expanded beyond natural food specialty stores, such as Whole Foods Market (WFM), to the grocery and mass market channels, among others. Of course, rising consumer demand has also attracted competition from other manufacturers. That said, internationally, the industry is still in its relative infancy compared with the U.S., pointing to additional distribution avenues.
With that backdrop, how much runway is left for the company before sales and profit growth begins to erode meaningfully? Are these shares suitable for investors looking to establish or add to positions within the food sector? In this article, we will address these issues by performing an easy-to-follow SWOT analysis of the company, evaluating its Strengths, Weaknesses, Opportunities, and Threats.
The Business
Hain Celestial manufactures, markets, distributes and sells natural and organic products under a myriad of brand names, collectively sold as “better for you” products. It targets the grocery, snacks, tea, and personal care categories. Brands, which are generally well known within their respective categories, include Almond Dream, Celestial Seasonings, Earth’s Best, Imagine, MaraNatha, Sensible Portions, and Terra. As of June 30, 2014, the company had 4,400 full-time employees. Hain Celestial was formed in May, 2000 through the merger of Hain Food Group with Celestial Seasonings. Its worldwide headquarters is in Lake Success, New York.
The company reports three operating segments: United States, United Kingdom, as well as Canada and Europe. Customers include specialty and natural food distributors, supermarkets, natural food stores, mass market retailers, e-tailers, the food service channel, as well as club, drug, and convenience stores. Hain’s two largest customers are United Natural Foods (UNFI), which distributes to Whole Foods and Wal-Mart (WMT), which includes affiliates Sam’s Club and ASDA). Products are sold in more than 65 countries; international sales comprised about 40% of the overall $2.2 billion generated in 2014.
Strengths
First-mover Advantage: As previously mentioned, prospective growth in the natural/organic segment far outstrips that of the conventional food space. Hain will likely continue to participate in this expansion, partly due to a notable first-mover advantage. Indeed, the company was originally founded in 1993, which gave them about a 20 year head start on industry leaders that have only recently woken up to the fact that consumer demand for natural/organic is here to stay. Too, as the first pure-play natural/organic manufacturer, Hain is now in an enviable position vis-à -vis supplier arrangements, as purchasing raw materials in bulk affords it bargaining power. Moreover, rivals have neither Hain’s depth of natural and organic products nor their extensive distribution footprint. As such, many of the company’s brands have built significant equity and pricing power over their lengthy histories, holding either the #1 or #2 market share in their respective categories.
Acquisition Proficiency: Since inception, management has principally built the product portfolio via strategic acquisitions. Given a track record of steady earnings growth, the company seems to have proven its ability to fund profitable expansion in this manner. Too, targeting the right space in the early innings has allowed Hain to acquire many brands with little bidding competition from industry giants. We find that purchase terms have generally been attractive, with assets often trading hands at less than 1x sales.
Weaknesses
Tangible Book Value: While Hain has been quite successful at integrating accretive acquisitions, many of these asset purchases have involved rather large intangible components. As of the end of March, goodwill and other intangible assets of about $1.8 billion actually exceeded total shareholders’ equity. This implies a negative tangible book value. Too, based on several metrics, HAIN trades at higher multiples than the majority of other food processing issues we cover, and does not pay a dividend. Thus, despite a favorable growth outlook, unlike many food stocks, these shares hold little appeal for value/income-oriented investors.
High Prices: Compared with conventional products, natural/organic varieties generally carry significant price premiums. In the last few years, consumers have been willing to pay this premium, in part because the group that predominantly purchases these products has above-average income and a lower level of unemployment. However, if the economy revisits the recessionary climate of 2007-2009, Hain may have to lower prices to retain customers, hindering gross margins and profitability.
Opportunities
Industry Consolidation: About 10 months ago, Hain purchased the remaining 51% of Hain Pure Protein that it didn’t already own, including a 19% stake in Empire Kosher Poultry, a supplier of antibiotic- and hormone-free chicken and turkey products. In March, Hain bolstered its specialty poultry portfolio by purchasing the outstanding 81% of Empire. With the natural/organic industry still fragmented, Hain should continue to be a consolidation leader, with acquisitions augmenting internal sales growth for the foreseeable future.
Distribution: With natural/organic products becoming increasingly “mainstream”, we see a sizable long-term sales growth opportunity for Hain. To date, distribution within the grocery, mass market, and club store channels still lags the penetration rate at specialty stores considerably. To wit, many of the company’s products have domestic grocery ACVs (all commodity volumes, or the percentage of retailers that carry a product) under 50%. Per management, Hain’s top 100 products achieving a 50% ACV would drive incremental sales of about $250 million. Also, additional distribution opportunities could unfold if less mature, international markets follow the domestic path toward natural/organic.
Threats
New Entrants: In order to offset sluggish sales of traditional products, many larger food companies are ramping up their natural/organic presence. For example, ConAgra (CAG) purchased Blake’s All Natural Foods earlier this month. Last September, General Mills (GIS) bought Annie’s. Also, Kellogg (K) recently unveiled its Origins cereal and granola line, while Campbell’s (CPB) launched a series of organic soups. As industry stalwarts such as these more aggressively target the natural/organic space, Hain will be confronted with a tougher competitive landscape. This could take a bite out of sales gains and lead to being out-bid for acquisitions, or at least result in less favorable purchase terms.
Conclusion
The future target customers for Hain are Millennials, or those in the approximate birth year range from the early 1980s to the early 2000s. There is evidence that this group is becoming more educated than older generations about ingredient quality, which augurs well for sustainable consumer demand. Hain has a wide geographic footprint and continues to penetrate the mainstream channels, as retailers find it increasingly necessary to stock natural/organic products to remain competitive. As the segment evolves to comprise a higher percentage of the $800 billion U.S. food market, Hain should continue to reap the rewards.
