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In case you missed the KR call today, we’d like to put out there part of the Q&A where management spoke about natural and organic products.  Importantly, KR said “we saw strong double digit unit and sales growth in Simple Truth and Simple Truth Organics.”  But, perhaps more importantly, the company went on to speak about margin pressure in the natural and organic segment.

See the interchange below:

<Q>:  I guess just following up on Kate's questions earlier on natural organic.  You mentioned innovation as a big part of the growth you're seeing in the channel of the response and the consumer.  Can you provide a little more detail on the number of SKUs you've added in these categories, the additional rollouts you plan and how many of the sales you think has been incremental?  And then as a corollary there, how you think about the margin associated with this category versus how you think about the rest of the store?

<A>: In terms of incremental, it's hard to say.  There is lot of switching that goes on today between natural and basic type of products.  As we have mentioned, we expect our Simple Truth brand to be a billion dollar brand this year.  So customers are as interested today and are as engaged in natural and organic as they've ever been.  Also, we don't talk a lot about organic produce, but that's a category that continues to grow. It could probably grow faster if supply was better, but we continue to enjoy large sales growth in that particular area.

<Q>: And just so, again, on I guess any additional SKUs that you're planning to roll-out on top of what you've done already and also how you think about the margin in these categories, I guess now and going forward.  Thank you.

<A>: Yeah, SKU count continues to increase, and the departments continue to grow in many cases, both on the private label side as well as the branded side. Margins, I tell you what, there's more margin pressure now on natural and organic than there's ever been.  It seems that it's becoming more and more of a competitive category, and so although margins tend to be better in natural and organic, I don't know if that's going to continue, you know, for the foreseeable future.

Our bearish bias on HAIN is in part based on the fact that they don’t have the margin structure to defend against an increasingly competitive environment.

So far we’ve been wrong with our call, but the evidence supporting our case continues to pile up.  If we continue to be on the wrong side of this trade it will be because the market thinks the company will be bought out.

Howard Penney

Managing Director

Fred Masotta