Photo Courtesy of The Hain Celestial Group Inc.
Here is an argument for diversification. Hain Celestial Group, Inc. (NASDAQ:HAIN) is being punished by the market today after it issued a press release to announce it would delay the release of its results for the fourth quarter and fiscal year 2016. The company acknowledged concessions were made to certain U.S. distributors in the fiscal fourth quarter of 2016, and HAIN is currently evaluating whether the revenue associated with those concessions were accounted for in the correct period. HAIN is also evaluating the internal control over financial reporting. HAIN's board of directors will also conduct an independent review.
What does this mean?
Revenue recognition is a topic many of us slept through in our introductory accounting class in college and is easily confused. Consumer packaged goods (CPG) manufacturers like HAIN contract with resellers to distribute their products to consumers. Depending on the contact, HAIN may be able to recognize revenue when its product is shipped to the retailer, or may be required to recognize revenue only when its product is purchased by the final consumer. See this meticulous explanation by Ernst and Young. Concessions may have been slotting fees, discounts or free products, but are usually treated as a reduction of the transaction price. If HAIN recognized revenue related to these concessions in a period prior to F16Q4, their revenue reported for a prior was likely inflated.
Implications for Investors
While the market is punishing HAIN today it is difficult for an investor to know exactly what happened with HAIN’s revenue recognition. The company included this comment in its release:
The Company expects that any potential changes in the timing of the recognition of revenue with respect to these transactions should not impact the total amount of revenue ultimately recognized by the Company with respect to such distributors and does not reflect on the validity of the underlying transactions with respect to such distributors.
From HAIN’s release, the company would have investors believe this is a cosmetic change in accounting practices, but the fact that an independent review is has been initiated is concerning. Until further information is provided we do not know the impact this incident will have on the business.
We own a small stake in HAIN which is now down 23% as of 3 PM ET today from when I purchased it in mid-late June. Though I could liquidate the position and realize a capital loss, the position is now less than one third of one percent of the entire portfolio and I would rather maintain exposure to HAIN until we learn more about this incident.
Four years ago we held a position in New Oriental Education (EDU) – a private educator in China. Highly skeptical of governance in China (corporate or otherwise), I quickly sold our shares of EDU when they lost half their value after announcing a similar review of revenue recognition. Sixteen months later the market had forgiven EDU for it accounting mishap – the stock price recovered to previous highs – and today, after more stock price volatility and impressive sales and earnings growth EDU trades for four times the price at which I sold it.
Ultimately this new incident will not likely be material to HAIN’s business in five years. I will not add to our position in HAIN, but we will hold these shares through this volatile point in the company’s history. I still like the company’s brands and prospects and unless we determine HAIN was trying to maliciously misrepresent revenue or earnings I want to be part of their future.