Analyst Note| Rebecca Scheuneman, CFA |
The highlight of no-moat Hain Celestial’s third-quarter earnings report was the improvement in profit margins. Adjusted gross margins expanded 320 basis points to 27.4%, driven by the elimination of low-margin products, supply-chain efficiencies, and the sale of the low-margin U.K. fresh fruit business. Adjusted operating margins increased 390 basis points to 12.1%, given savings from the consolidation of North American operations into one business unit. The margin benefit from selling the fruit business was more material than we expected, and we plan to increase our five-year average gross margins 90 basis points to 27.5% and our five-year average operating margins by 180 basis points to 12.4%. This should result in a mid-single-digit increase to our $34 fair value estimate, but with shares trading above this, we suggest investors remain on the sidelines.