Hain Celestial shares tumble 27% as accounting probe delays results

Hain Celestial Group (HAIN) shares tumbled more than 27 percent before the market's open Tuesday after it delayed the release of its fiscal 2016 financial results, missed guidance and announced potential accounting concerns.

During the fiscal fourth quarter ended in June, Hain "identified concessions that were granted to certain distributors in the United States," the company said in a press release after the close Monday.

In its release, Hain said it is "evaluating whether the revenue associated with those concessions was accounted for in the correct period and is also currently evaluating its internal control over financial reporting. Previously, the company has recognized revenue pertaining to the sale of its products to certain distributors at the time the products are shipped to such distributors."

"Although we do not know what triggered this investigation, and/or potential impact it could have on Hain's financials, we believe the issue is timing related and that the market is likely pricing in all the bad news," said Jefferies analyst Akshay Jagdale in a research note Tuesday. The analyst kept his "buy" rating on the stock and called the drop "a potential buying opportunity."

However, other analysts rushed to downgrade the stock and Bernstein analyst Alexia Howard suspended coverage of it until the accounting issues are resolved.

Historically, the company's largest customer has been United Natural Foods (UNFI), a distributor that accounted for about 12 percent of its sales in fiscal 2015, according to its last 10-K regulatory filing. The second largest customer is Wal-Mart Stores (WMT) with 10 percent of the company's net sales last year. Hain didn't disclose the name of the distributors in question.

Hain added that it will not be in a position to release fiscal 2016 financial results until completion of a review by its audit committee and indicated it has retained independent counsel to assist in that review. The company had been expected to report fiscal fourth quarter and full year results this week.

Additionally, Hain indicated it "does not expect to achieve its previously announced guidance for fiscal year 2016." The company's last forecast was issued in early May and was for sales in the range of $2.95 billion to $2.97 billion, an increase of about 9 percent to 10 percent. It had previously expected earnings per share in the range of $2 to $2.04 share, or a rise of about 6 percent to 9 percent compared with fiscal 2015.

"While the lack of adequate internal financial controls is disappointing, it is unlikely to impact Hain's leading position in the attractive health and wellness sector," BMO Capital analyst Amit Sharma said in a note. "Annie's faced similar issues related to the timing of its trade promotion/spending in 1Q14. However, after an initial 20+ percent decline, [Annie's] recovered within 30 days, before being acquired by [General Mills (GIS)] at an attractive valuation."

But Wedbush analyst Phil Terpolili said takeout speculation for Hain is "fully subdued" given Hain's fragmented brand base.

He expects it could take at least six to 12 months for the accounting-related issues to subside based on recent two examples in the sector, Keurig Green Mountain (GMCR) and Diamond Foods (which was ultimately acquired by Snyder's-Lance). Citing "limited conviction" Hain shares offer much potential to rise, Terpolili lowered Hain's rating to "neutral" from "outperform."

Both Hain's chief financial officer and chief accounting officer have left in recent months, Terpolili said.

Pasquale Conte was tapped in September to replace Stephen Smith, while Ross Weiner, the company's chief accounting officer, resigned in February.

Meantime, PiperJaffray analyst Sean Naughton downgraded his rating on Hain stock to "underweight" from "neutral," citing among other things "internal financial control risk make the stock difficult to own."

Barclay's analyst Andrew Lazar cut Hain to "equal weight" from "overweight," saying there are currently "more questions than answers."

"While it is typically not our preference to downgrade a stock on a day in which we anticipate it is likely to be very weak (as we expect today), in our view, there is sufficient uncertainty around any potential outcome and time frame of the review which leads us to view this as the more prudent course," Lazar said. He added that "there is no guarantee that the outcome of the review will be materially unfavorable and it could simply reflect timing."