By Kristin Broughton

Tea and snack maker Hain Celestial is under pressure to show investors that the company's turnaround effort, in place for a year, is bearing fruit.

Hain Celestial -- whose brands include Celestial Seasonings tea, Garden of Eatin' chips and Earth's Best baby and toddler food -- has struggled in recent years with lagging and uneven sales growth, largely because of underinvestment in the company's best-known brands, said Lee Boyce, the company's chief financial officer. The root cause: strain from years of acquisitions with little focus on integration, leaving the company with costly production and overlapping vendor relationships.

"When you're going through and doing all of these acquisitions and then divestitures, you're not focusing necessarily on things like innovation. You're not focusing on marketing," said Boyce, who joined the company in September 2023 as part of a new management team. Chief Executive Officer Wendy Davidson took over her role nine months earlier.

Hain Celestial said a year ago that it would restructure its operations in a three-year turnaround effort, with a goal of freeing up cash for innovation, marketing and debt reduction through better working-capital management and lower production costs. The company has made progress on its targets -- for instance, unlocking over a third of its target $165 million in working-capital improvements over the past year, Boyce said.

In the year ahead, the company will face a test to prove that the turnaround is working, with investors looking for improved gross margins and organic sales growth, analysts said. "This year is really going to be the proof point to show: How much can they extract out of the gross margin line?" said Jim Salera, an analyst at the investment firm Stephens.

During the quarter ended June 30, net sales fell 6% from a year earlier, to $418.8 million. On an organic basis -- excluding divestitures and discontinued products -- net sales fell 4%. The company's gross margin edged up 0.90 percentage point, to 23.4%. Hain Celestial's stock price on Wednesday closed at $8.73, down 17% from a year earlier.

Hain Celestial, like its larger competitors, expanded in recent decades through acquisitions, with a focus on brands that appeal to health-focused consumers. The company operates 39 brands globally. At its peak in 2018, it owned 64 brands. The company began shedding brands in 2021, before the turnaround effort, and has streamlined its product offerings over the past year as well.

One way that Hain Celestial has cut costs is by consolidating its manufacturing facilities and increasing utilization of its production lines. Before the turnaround, the company operated 31 manufacturing plants; it now operates 12.

In total, Hain Celestial has generated $65 million of what it describes as productivity savings over the past year, more than its fiscal 2024 goal of $61 million, Boyce said. "We looked at everything across the whole supply chain, and the endpoint is driving down the cost. And it has to be sustainable," he said.

Hain Celestial plans to redeploy savings into what it describes as brand building -- meaning innovation, marketing and expanded distribution. Recent examples of innovation include Sleepytime herbal tea with melatonin, a natural sleep aid, or biotin, a beauty supplement. Additionally, the company's Garden Veggie chips brand this year added new flavors, including nacho cheese and zesty ranch. The company has recently increased distribution through convenience stores.

It has freed up working capital by reducing inventory through improved forecasting, and by negotiating longer payment terms with large suppliers, according to Boyce. Its days payable outstanding -- a metric that shows a company's average payment term -- was 52 days during the 2024 fiscal year, compared with 37 days a year earlier, according to the company.

Meanwhile, the company is paying down debt. The company's turnaround plans include a target net debt-to-adjusted earnings before interest, taxes, depreciation and amortization ratio of between 2 and 3. That figure stood at 3.7 as of June 30.

"That gives them more freedom, more degrees of freedom, to both reinvest in the business and potentially drive some margin improvement," said Jon Andersen, an analyst at the investment firm William Blair.

Write to Kristin Broughton at Kristin.Broughton@wsj.com

(END) Dow Jones Newswires

October 09, 2024 17:23 ET (21:23 GMT)

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