Hain Celestial Taps Thirst For Natural, Organic Fare

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Herbal tea, cold-pressed juice, Greek-style yogurt, organic chips, almond milk.

If you've purchased these kinds of health-oriented products, there's a good chance at least some of them come from one company:Hain Celestial Group ( HAIN ).

Hain sells hundreds of natural and organic products under brands such as Celestial Seasonings, Terra, Garden of Eatin', Health Valley, WestSoy and Earth's Best.


And that's just a starter list.

"They probably have the best and broadest exposure to the natural foods industry in all channels of distribution," said analyst Scott Van Winkle of Canaccord Genuity.

It's a good place to be these days. Organic and natural foods are growing at a blended rate of at least 11% a year, Van Winkle says. Conventional food is growing in the low single digits at best.

Hain has logged double-digit sales and profit gains every quarter for more than three years. During its fiscal third quarter, which ended March 31, revenue grew 22% from the prior year to a record $557.4 million. Earnings also rose 22%, to 88 cents per share.

A Natural Choice

"(Hain) is a very good play on the core growth of natural and organic foods," Van Winkle said.

Major customers includeWal-Mart ( WMT ) as well asUnited Natural Foods ( UNFI ), a distributor that sells toWhole Foods Market ( WFM ) and other outlets.

Hain also sells to traditional grocery chains such asKroger ( KR ),Safeway (SWY), Wegmans and Publix.

Thanks to health and dietary concerns, the kind of natural and organic foods and personal-care products Hain sells have been gaining shelf space in traditional grocery channels.

"That is where the growth is coming from," Irwin Simon, Hain's chief executive, said in an interview. "We've seen the shift in the last couple of years."

He says about 60% of Hain's U.S. sales come from traditional grocery stores.

Rivals run the gamut from large packaged foods companies such asKraft (KRFT) andGeneral Mills (GIS) to small organic-food players such asAnnie's (BNNY).

"Given that Hain has such broad exposure, it has hundreds of competitors," Van Winkle said.

Meanwhile, the company's sales outside the U.S. have been increasing. They represented 42.7% of the total during the fiscal third quarter, up from 17.9% in 2011.

The U.K. is still Hain's biggest overseas market, with 32% of Q3 revenue. Hain's product mix in Britain includes a larger mix of mainstream grocery items than in the U.S., such as jams, peanut butter and desserts.

To feed consumers' hankering for organic and natural foods in the U.S. and elsewhere, Hain keeps rolling out new products and adding new brands through acquisitions.

Last year it launched 125 new products, Simon says, though it discontinued some others. New products rolled out this year ranged from snacks, soups and shakes to gluten-free pasta and personal-care items.

It's also been a big year for acquisitions, continuing a strategy Simon began in 1993 after he acquired struggling Hain Pure Food from Pet Inc.

Simon says his strategy has always been to "buy brands started by someone else," and then "figure out how to grow them from there."

In January, Hain spent $357 million to buy Tilda Ltd., a premium Basmati and specialty-rice company based in the UK, with sales in more than 40 countries.

Also this year, Hain acquired Rudi's Organic Bakery, which makes a popular organic bread. And last week Hain bought the remaining 51.3% interest it didn't already own in antibiotic-free and organic poultry brands FreeBird chicken and Plainville Farms turkey.

Organic baby foods company Ella's Kitchen Group was added last year, expanding Hain's large reach into the baby market, where Earth's Best sells everything from infant formula to diapers.

In December 2012, Hain bought cold-pressed juice business BluePrint Cleanse, putting Hain in a market that is "very on trend," Van Winkle said.

Even old trends still have juice. For example, the Celestial Seasonings tea brand contributes only 6% to 7% of overall sales but produces margins that are "quite good," Piper Jaffray analyst Sean Naughton noted in a report earlier this month.

In addition, he says, tea comes with "steady profitability" and cash flow that can be invested in other areas of the business.

As calming as tea is for Hain, Wal-Mart's expanded rollout of organic products through the Wild Oats brand may cause some stress among organic-food players.

"With Wal-Mart launching Wild Oats at lower prices, our concern is that it could put downward price pressure on the organic category," said John Baumgartner, analyst with Wells Fargo Securities.

Immaterial Threat?

Since Hain has such a diversified product mix in organic products, it might feel the price pinch more than other companies with a narrower focus, he says.

Even so, Naughton views the Wild Oats threat as "largely immaterial" to Hain, based not on pricing pressures but on the fact that Hain and Wild Oats directly compete on only a small percentage of products.

Assuming 20% to 30% cannibalization in affected categories, he figured "a modest" headwind to Hain's revenue growth over the next 12 months.

Another potential risk comes from United Natural Foods, which looks to improve inventory turns by buying fewer units from suppliers. Hain is "navigating the headwind by better product sales in other channels," Naughton said. However, United Natural's inventory-reduction program took away "some upside" to his revenue estimates for Hain.

Analysts polled by Thomson Reuters estimate Hain will post earnings of $3.16 a share for all of fiscal 2014, up 25% from last year. Revenue is expected to rise 24% to $2.15 billion.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Investing Ideas

Referenced Stocks: HAIN , WMT , UNFI , WFM , KR

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