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HAIN reported its fiscal Q2 2014 earnings after the close yesterday. The report was mixed:  while the company achieved double digit sales growth in the quarter, the trend is slowing, and CEO Irwin Simon noted commodity headwinds in the remainder of the year. While we remain bullish on HAIN’s portfolio – which meets customer demand of organic and natural products – we think this richly valued stock is heading lower based on our quantitative setup and profitability concerns in an environment of #InflationAccelerating.

The stock took a leg down after the print and has traded down as much as -10% intraday today.

HAIN – Gross Margin Headwinds Sting? - a. hain ch

As you can see from the chart below, sales of $535M in the quarter (an increase of 17.5% Y/Y) took a leg down in the quarter. The Q&A was filled with the management team explaining away what was a weaker quarter based on price and inventory shifts, particularly in the U.S. and U.K. that negatively impacted results. 

Gross margins fell in the quarter (26.8% vs 28.7% in the year-ago quarter) and we think investors are concerned with rising commodity prices in 2014, in line with our macro team’s Q1 theme of #InflationAccelerating.  Starting with a base of higher costs to produce organic and natural products, its two largest commodities in almond and dairy have already seen significant price gains.  The company expects its basket of commodities to inflate by +3.2% this year – we think a big threat to the company is its inability to expediently take pricing, especially in a macro environment that see the consumer still challenged in the U.S. and Europe.   

We’re bullish on the company’s recently completed acquisition of Tilda (a rice company) and its integration in the Middle East and Asia, in particular. The company boosted its full-year earnings and revenue outlook, now expecting per-share profit of $3.07 to $3.15 and a top line of $2.12 billion to $2.15 billion. In November, the company said it expected $2.95 to $3.05 and $2.03 billion to $2.05 billion, respectively.

HAIN – Gross Margin Headwinds Sting? - z.price diverg

Call with questions,

Matt Hedrick