Analysis investment thesis we are maintaining our

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ANALYSIS INVESTMENT THESIS We are maintaining our HOLD rating on Hain Celestial Group Inc. (NGS: HAIN). There are no signs of a turnaround yet as the company continues to face margin pressure despite management’s efforts to cut costs and boost profitability. On the positive side, we are encouraged by better trends internationally, the natural channel and at Whole Foods, as well as by growth in the online business. In 2016, management announced a strategic plan it calls Project Terra to drive growth and profitability. The plan is focused on reducing complexity and cutting costs, with a target of $350 million in savings through FY20, as well as on consumer engagement and brand investment initiatives for major products. As part of this effort, management is focusing on the company’s top 11 brands and 500 SKUs, and phasing out lower- margin SKUs. We would consider an upgrade if these initiatives yield positive results in FY18. While management says that it has now addressed the company’s accounting issues, we continue to monitor developments in the SEC’s investigation of Hain. Hain has attracted interest from activist investor Engaged Capital, which took a 9.9% stake in the company last June, increasing it to 11.1% in February. We expect the involvement of Engaged Capital, which has already resulted in the appointment of six new board members, to lead to an eventual sale of all or part of the company. Hain shares jumped in late November 2017 following reports of preliminary discussions with Nestle. The company also announced on February 7 that it is exploring the sale of Hain Pure Protein, a non-core business, which we believe could make it a more attractive acquisition target. RECENT DEVELOPMENTS Hain shares sunk to a four-year low last June and quickly rebounded; however, year-to-date, the shares are down more than 34% versus a gain of 2% for the S&P 500. On May 8, Hain reported results for the third quarter of fiscal 2018. Net sales of $632.72 million rose 8% on a reported basis and 2% in constant currency. SG&A as a percentage of sales increased 67 basis points to 13.6%. Adjusted operating income fell to $56 million from $58 million, while the adjusted operating margin contracted to
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M ARKET U PDATE - 11 - 8.9% from 10% a year earlier. GAAP net income from continuing operations fell 23% to $25.2 million from $32.8 million, while adjusted net income rose 6% from the prior year to $38.6 million. Diluted GAAP EPS fell 22.6% to $0.24 from $0.31 in 3Q17. Adjusted diluted EPS rose to $0.37 from $0.35 a year earlier, but missed the consensus forecast by $0.10, primarily due to considerably higher-than-expected expenses during the quarter. Hain’s accounting practices have been subject to an ongoing SEC investigation. The investigation focuses on concessions granted by Hain to certain U.S. distributors, and whether these concessions were recognized in the proper quarter. Hain initially disclosed the concessions in August 2016 and arranged for an accounting review by an independent auditor. In November, Hain said that the auditor had completed its review and had found no evidence of wrongdoing. Management said that it was current with all financial reporting obligations.
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