3 Great Reasons to Sell Hain Celestial Group Inc

By Brian Stoffel Markets Fool.com

I've never shorted a stock in my life. But if I were so inclined, one stock that would be at the top of my list would be organic-goods conglomerate Hain Celestial (NASDAQ: HAIN). If you own shares of the company, here are three big reasons I think you should consider parting ways.

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Image source: Getty Images.

1. Huge questions surrounding inventory

Back on Aug. 12, shares of Hain were trading for $55 per share. Then, the company released a bombshell: It was delaying the release of earnings. It stated:"During the fourth quarter, the Company identified concessions that were granted to certain distributors in the United States. The Company is currently 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."

Shares fell as much as 35% in the aftermath.

In mid-November, the company announced that an internal review, "found no evidence of intentional wrongdoing in connection with the Company's financial statements." Since then, shares have advanced over 15%.

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But here's the thing: We still have no idea where the company stands. The November release concluded by saying, "Hain Celestial will not be in a position to release financial results until the completion of the Company's internal accounting review and the audit process." It's been over 60 days since then, and 150 days since the problems surfaced, and we still have no idea what the scope and consequence of these "concessions" truly are.

While it's admirable that the company is apparently doing a thorough job, with each passing day it becomes increasingly likely that these concessions were a bigger problem than originally feared. Either way, we have a company that is trading for 20 times what we think trailing earnings could be. While that's not outrageous, I think it's pretty high when so many question marks are present.

2. Leadership with no skin in the game

Generally, I'm a huge fan of founder-led companies. Hain is one such entity, as it was founded and built by Irwin Simon. In fact, I was a shareholder for quite a while before parting ways with the company in early 2016.

But there's something that I think necessarily needs to go hand-in-hand with being an owner-operator: You have to have skin in the game. While Simon owned 2.4% of shares outstanding as of the company's last proxy filing, one-third of that came from the filing of options. In other words, it was not necessarily representative of long-term skin in the game. Furthermore, when all officers and directors were added together, they owned just 3.1% of shares outstanding.

If this were a behemoth company, I could understand such low equity. But Hain is a relatively small $4 billion company, and Irwin founded it all the way back in 1993. Furthermore, between 2013 and 2015, Irwin's average compensation package came in at over $18 millionper year.

Another way of viewing this is to say that Irwin had lots of upside exposure (through his salary and compensation), with relatively low downside skin in the game (via equity holdings). If you invested in the company, you were paying him, not necessarily investing with him.

His employees don't give him or the company very favorable reviews either, with a mere 10% approval rating on Glassdoor.

3. Where's the moat?

But perhaps most troubling is how this business was built in the first place. Hain is nothing more than a collection of hundreds of what were once small, successful, independent organic and natural brands. That meant big business for a long time: Hain was one of the first to really understand what a huge trend the natural/organic movement was, and the company and its stock benefited for a long time.

However, there are two huge problems with the growth-via-acquisition strategy. First, when a company acquires so many different brands, it becomes endlessly complex. The independent spirit that often made a natural brand successful was squashed through a cultural mismatch once it entered Hain's domain. As one Glassdoor reviewer put it: "Hain is where brands go to die."

The second problem is that with the success of natural and organic products, competition has followed. Outside of the power of the brand, there's little economic moat to speak of with these companies. Nothing is stopping the very same small and independent-type brands that Hain could once acquire from stealing business away over the coming years and decades.

Essentially, that's what has happened to Hain's most important customer: Whole Foods. After years of playing alone in the organic sandbox, its growth has wilted under the pressure from both smaller players and big-box grocery stores offering the same fare.

Add it all together -- question marks surrounding accounting, management with too little skin in the game, and no real moat -- and you have three great reasons to part ways with your Hain shares.

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John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Brian Stoffel has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Hain Celestial and WFM. The Motley Fool has a disclosure policy.