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HAIN | LOW QUALITY & INCREASED BUSINESS RISK

HAIN remains on the Consumer Staples Best Idea list as a SHORT.

 

We continue to believe that HAIN is a collection of brands and businesses that are not deserving of the premium valuation.  The company is only one of a few that participate in the “better-for-you” space, but not all companies are created equal.  HAIN’s business model is a risky roll-up story whose better days are in the past. 

 

The most recently reported 4Q15 only confirms this belief and the issues the company faces today are very relevant to the future of the company. 

  1. Business trends and a sum of the part analysis suggest that the UK business is overvalued
  2. The drive to cut costs increases business risk
  3. The quality of earnings is the lowest in the Consumer Staples sector

 

SUM OF THE PARTS

The performance of the UK business last quarter was anything but organic.  The company reported a -7.8% decline in revenues and a 210bps decline in operating margins, before currency adjustments.  Management alluded to the UK segment net sales being up in “constant currency,” but the retailer environment remains very competitive. Consistent with past quarters management did not comment on real organic growth, but went on to say “we saw good growth from our soup, grocery, desserts, rice and plant-based beverages.”  With private label at 40% of sales in the UK segment and seeing declining volumes, the organic growth on the business is limited.  Taken together; the 4Q15 performance, limited visibility to organic growth in FY16, and significant exposure to private label should lead the UK business to be valued at a substantially lower multiple than the U.S. business.  

 

As we have demonstrated in our past Black Books, HAIN is less than forthcoming with detailed information on how the core business is preforming and clearly overstates the positive business trends.  This past quarter is just another example of the company hiding what the true organic growth is of the UK business.

 

HAIN | LOW QUALITY & INCREASED BUSINESS RISK - CHART 1 

 

CUTTING INTO THE MUSCLE

One of our biggest issues with the company is the secular decline in gross margins.  As the environment for “better-for-you” products in the U.S. gets more competitive, HAIN will not be able to defend brands or market position.  The only weapon the company has to defend itself on declining gross margins is to take massive cuts in G&A.  Cutting G&A is never a long term winning proposition, and cutting too deep can put the business model at risk.  This quarter looks as if they are cutting into the muscle of the company.  With the current G&A cuts the company is now taking a big risk with their most important distribution channel.  

 

In 4Q15, HAIN announced that they were moving their natural channel merchandising team to Advantage Sales & Marketing to “drive SG&A productivity.” Advantage is a third party national sales and marketing company that works with many companies within the consumer packaged goods space.

 

This is just the latest move by HAIN to reduce costs, saving them roughly 20-25% per year. Advantage is used by some of the big players to supplement their sales and marketing in the natural & organic channel, specifically on slower moving sku’s. The problem with HAIN’s use of this company is its sole dependence on it, as they said they moved their entire natural channel merchandising team to Advantage.

 

Transferring the entire operation out of HIAN is strategically a very risky idea and could lead to a loss of brand expertise at the company.  HAIN will effectively go from managing their brands first hand to having a third party manage them, depending on how their contract is structured (dedicated resources or not) will be a pivotal factor.  The biggest advantage of an internal sales force is, share of mind, you want your employees pitching your products. How do you know the third party will be representing your brands in the best light?

 

Advantage is a middle market provider from a cost perspective, definitely cheaper than others, such as Crossmark.

 

LINE ITEM ADJUSTMENTS LOWER THE QUALITY OF EARNINGS

The company’s ability to make the numbers is growing increasingly challenged and management is being forced to adjust more lines to meet expectations.   

 

HAIN | LOW QUALITY & INCREASED BUSINESS RISK - CHART 2

 

 


CHART OF THE DAY: Head Fake Or New Bull Market?

Editor's Note: This is a chart and brief excerpt from today's Early Look written by Hedgeye CEO Keith McCullough. Click here if you'd like to join us in staying a step or two ahead of consensus. 

 

...So, as Ray Dalio would ask, what is the truth – head fake or the new bull market?

 

It’s definitely a bull market in long-term US Treasury Bonds. In today’s Chart of The Day we show you how well the Long Bond has done versus something that we have not liked (the Russell 2000) going back to 2014.

 

CHART OF THE DAY: Head Fake Or New Bull Market? - z bird 08.31.15 chart


No Cowbell?

“When there is trust, conflict becomes nothing but the pursuit of truth.”

-Patrick Lencioni

 

That’s one of the better risk management and leadership thoughts that came out of The Advantage – a book I just finished reading this weekend. For those of you looking for help refining and/or reworking your #process, it’s worth your time.

 

Far from its constitutional mandate established in the Federal Reserve Act of 1913, this Fed’s thought process appears to very much include what the US stock market is doing on any given day in order to give the market clarity on their decision making process.

 

When markets were on their lows last week, both the NY and Atlanta Fed heads (Dudley and Lockhart – both voters) went dovish. Then, post the bounce, Vice Chair Fischer went hawkish in his Jackson Hole speech on Saturday. In other words, no #cowbell.

No Cowbell? - Jackson Hole cartoon 08.238.2015

 

Back to the Global Macro Grind

 

To be clearer than they have been (Fed Fund Futures, which measure the probability of a SEP rate hike, have been trading all over the place in the last week), there should be very little trust that the Federal Reserve is in pursuit of anything but pro-cyclical truths.

 

Pro-cyclical means that #LateCycle economic readings look “really good” at the end of the cycle. Since things like employment and “wage growth” are already slowing in rate-of-change terms, you’re one bad jobs report away from #truth there.

 

But, if the S&P Futures are up – we’re “all set” and readying for the 1st modern Federal Reserve rate hike, into a slowdown. I’m sure consensus is right and that “won’t be a big deal” at all. It’s “just 25 basis points.” And Q3 GDP might just be 0.1%.

 

The scarier part of last week’s bear market bounce was that it was led by markets that are, well, in bear markets!

 

  1. Oil (WTI Crude) was +11.8% on the week, but remains -22.5% in the last 3 months (and is -2.3% this am)
  2. Russian Stocks (RTSI) were +8.9% on the week, but remain -16.2% in the last 3 months (-2.6% this am)
  3. Energy Stocks (XLE) were +3.5% on the week, but remain -16.2% in the last 3 months (will lead lower this am)

 

And most of this is wasn’t based on anything other than the mid-week begging for more Federal Reserve, European Central Bank, and Chinese #Cowbell… so, we’ll reverse some of that “reflation” this morning as Stanley Fischer pivoted from saying that “market volatility affects our timing” (on Friday) to “we shouldn’t wait for 2% inflation” (on Saturday).

 

But, since it’s in every cycle-top’s consensus character to chase bounces as opposed to selling them, on the way down today we’re going to have less people who are hedged. That’s right, less. Check out the consensus hedges in CFTC non-commercial options:

 

  1. SP500 (Index + Emini) net SHORT position dropped to its lowest in 3 months, +86,285 on the wk to -40,845
  2. EUR/USD net SHORT position dropped to its lowest of the year, +29,934 on the wk to -59,250

 

In English, that means:

 

  1. Why the Worst May Be Over” (cover of Barron’s on US stocks) had bears covering and bulls getting longer
  2. Consensus Macro was betting the Fed was going to be MORE dovish than the Europeans (ECB)

 

And, since less people trust that this morning than they thought they could on Friday, the pursuit of expectations continues…

 

Where else might you have risk this morning? Look no further than US Equity Market Style Factors that looked a lot like Fed/Reflation speculation last week:

 

  1. High Short Interest Stocks got squeezed +2.2% off the lows, but are still -9.7% in the last 3 months
  2. High Beta Stocks bounced +2.9% off the lows, but are -12% in the last 3 months

 

Like Oil, Russia, and Brazil (Bovespa +3.1% on the week, but still -12.6% in the last 3 months), these Style Factors (High Short Interest and High Beta) in your portfolio had what we call a head-fake bounce (if you’re bearish) or a positive divergence (if you’re bullish).

 

So, as Ray Dalio would ask, what is the truth – head fake or the new bull market?

 

It’s definitely a bull market in long-term US Treasury Bonds. In today’s Chart of The Day we show you how well the Long Bond has done versus something that we have not liked (the Russell 2000) going back to 2014.

 

Much like another place we have not liked during this #Deflation phase transition (Junk Bonds), small and mid-cap stocks also have one of the top risk factors you want to protect against during an economic slowdown – liquidity.

 

What is the #truth about market liquidity right now? Have we, as a profession, told the world what is really going on here on that risk factor? Has the Federal Reserve? Without #Cowbell, but plenty of obvious Liquidity Traps, who do you trust?

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.99-2.22%

SPX 1
RUT 1085-1193
VIX 20.12-43.28
EUR/USD 1.09-1.16
Oil (WTI) 36.99-45.32

Gold 1110-1167

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

No Cowbell? - z bird 08.31.15 chart


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More #Cowbell?

Client Talking Points

FED

Federal Reserve Vice Chairman Stanley Fischer opted for dovish comments on Friday, making his Saturday comments more hawkish – we guess they look at the S&P Futures now before saying anything of consequence (today he’d be dovish). Fed Fund futures have ramped back up to 38% on a SEP hike probability – reminder: the Fed has never hiked into a slowdown.

COMMODITIES

Dovish = commodity reflation; hawkish = commodity #Deflation – so the deflation TREND is right back on this morning with Oil, Copper, and Russia down -2-3%; WTI’s risk range blew out to $36.99-45.32 on Friday, all but ensuring that massive volatility remains in this asset class.

S&P 500

The S&P 500 still has the widest risk range our model has generated since 2008 at 1,835-2,017 with the more probable level being the downside one (-7.7% from Friday’s close), given that the Fed could be tightening into a 0.1% GDP environment here in Q3 (our low-end scenario with the high end being at 1.5% and the Atlanta Fed tracking 1.2%).

 

**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 67% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 3%
FIXED INCOME 30% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

We recently tried out the "Create Your Taste" experience at the newly remodeled McDonald’s location in Midtown East on the corner of 58th street and 3rd Ave. Walking into the newly remodeled MCD, we were greeted by the brand new self-order kiosks with attentive staff there to assist you. Customers were very interested in using the kiosks, and everyone using them seemed to be having an easy time with it.

 

For it being only two weeks into the process we were very impressed by the efficiency and mastery the staff is already displaying. We plan to head back to the same McDonalds location and check on their progress.

PENN

Our Gaming, Lodging & Leisure team is going to furnish a new update following their recent meeting with Penn National Gaming's management. They note that the stock has held up quite well despite increased market volatility. The bullish thesis on shares of PENN remains intact. Regional revenues remain strong in addition to the 2-year growth story, etc. Stay tuned.

TLT

As we outlined through various channels, we expect that high levels of volatility are here to stay for the foreseeable future. The biggest shift last week that we’ll call out is a bullish to more neutral intermediate-term view on the U.S. dollar which is why we added GLD to investing ideas in replace of UUP. To be clear, if growth continues to slow we want to be long of bonds (that view hasn’t changed in a year and a half).

 

From an asset allocation perspective here is the set-up:

  • Growth slowing: Long bonds and low-beta yield chasing sectors (TLT, EDV, XLU)
  • Shift to more dovish policy: long of GOLD as the shift weakens the value of the USD

We re-iterate the same view we’ve had since the beginning of 2014: Growth is slowing, and deflation remains a real risk (central bankers can’t solve this by talking down the currency). The fed will continue to push out the dots on “policy normalization.”

Three for the Road

TWEET OF THE DAY

COPPER: the Doctor didn't follow through either, -1.4% as #Deflation TREND remains

@KeithMcCullough

QUOTE OF THE DAY

When there is trust, conflict becomes nothing but the pursuit of truth.

Patrick Lencioni

STAT OF THE DAY

Last Monday Facebook, founder and CEO Mark Zuckerberg announced, Facebook hit a record of 1 billion people visiting the service in a single day. Facebook has about 1.5 billion active monthly users, this is the first time the site has had 1 billion unique people visit in a day.


The Macro Show Replay | August 31, 2015

 


August 31, 2015

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BULLISH TRENDS

August 31, 2015 - Slide2

August 31, 2015 - Slide3

 

BEARISH TRENDS

August 31, 2015 - Slide4

August 31, 2015 - Slide5

August 31, 2015 - Slide6 

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August 31, 2015 - Slide10


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