Herbalife Q1 Earnings Strong Despite Probes - Analyst Blog

Herbalife Ltd. HLF recently reported impressive first quarter 2014 results and raised its guidance for 2014 despite being weighed down by investigations.

This weight management and nutritional products company delivered first quarter adjusted earnings of $1.50 per share, which exceeded the Zacks Consensus Estimate of $1.29 by 16.3%. Earnings were ahead of the company's guidance of $1.25-$1.29 per share, announced during fourth quarter earnings. Adjusted earnings increased 18% year over year on the back of double-digit growth in the top line.

Net sales of $1.263 billion beat the Zacks Consensus Estimate of $1.234 billion. Net sales grew 12.4% from the prior-year period fueled by volume growth of 9%. This was slightly higher than the company's guided range of 8.0% to 10.0% net sales growth and 6.5% to 8.5% volume growth.

China outperformed in the first quarter with extraordinary volume growth of 91.1%. The Chinese market is vital to Herbalife as nearly 11% of its revenues are generated from China. However, volumes declined 6% in Asia Pacific. The company believes that rising health consciousness among consumers worldwide increased the demand for Herbalife's products.

Other Financial Details

In the first quarter of 2014, the company paid $30.4 million in dividends and repurchased $685.8 million of shares under the previous share repurchase program. However, the company has decided to terminate the company's quarterly cash dividend henceforth and instead utilize its cash to repurchase shares during the second quarter of 2014.

Guidance

Full Year 2014

Following solid first quarter 2014 results, increased share buyback and growth in China, Herbalife raised its earnings guidance for full year 2014.

For 2014, the company expects adjusted earnings in the range of $6.10-$6.30 per share, higher than the previous guidance range of $5.85 to $6.05. It is also higher than the year-ago earnings of $5.37 per share. The company now expects sales growth in the range of 10.0% to 12.0%, higher than the prior expectation of 7.5% to 9.5%. Volume growth is expected in the range of 8% to 10% for 2014 versus prior range of 6.5% to 8.5%. However, in the year 2013, net sales grew 18% driven by volume growth of 13%.

Second Quarter 2014

For the second quarter of 2014, the company expects its adjusted earnings in the range of $1.51 to $1.55 per share, much higher than $1.41 per share earned in second quarter 2013. Net sales growth is expected in the range of 10.0% to 12.0% driven by volume growth of 7.0% to 9.0%. However, in the last year quarter, net sales grew 18% driven by volume growth of 14%.

The company expects to repurchase shares worth $581 million as part of its previously announced $1.5 billion share repurchase program.

Despite impressive earnings, Herbalife's business practices have been criticized since Dec 2012, when activist investor William Bill Ackman, hedge fund manager of Pershing Square, first accused the company of making money by recruiting new sales personnel and not from its sales. Ackman also unveiled a $1 billion short position in the company's shares in 2012. Reportedly, Ackman tried to lobby Congress members in Mar 2014 to push for an investigation against Herbalife by state and federal regulators, especially the Federal Trade Commission FTC. It seems that Ackman's persistent push for investigation finally met with success. As of now, Herbalife's operations are being probed by the Federal Bureau of Investigation, the Department of Justice, the U.S. Securities and Exchange Commission, FTC, and two attorney generals. Additionally, as per a report by New York Post in Jan 2014, the Canadian Competition Bureau is also looking into the company.

Herbalife, on its part, has been denying the charges since 2012 and has welcomed the inquiry. It stated that it will co-operate with the investigation as it is confident that its operations comply with all applicable laws and regulations. Carl Icahn, the company's biggest shareholder with a 16.8% stake, also supports Herbalife in its fight against Ackman.

Herbalife is not the only company, which employs sales representatives to sell its products. Other multi-level marketing companies like Nu Skin Enterprises Inc. NUS, USANA Health Sciences Inc. USNA and Avon Products Inc. AVP also follow the same distribution model.

We appreciate the fact that despite allegations of a pyramid scheme business model and numerous attacks on its multi-level marketing model, the company's earnings continue to increase. This signals that the stock has potential and will continue to move higher, going ahead.

Herbalife holds a Zacks Rank #3 (Hold).