Herbalife (HLF) Stock Up on Q1 Earnings & Sales Beat

Herbalife Ltd. HLF reported better-than-expected first-quarter 2016 results on the back of higher sales, improving volume trends and renewed optimism as the company tries to resolve the probe into its business practices.

This weight management and nutritional products company delivered first-quarter adjusted earnings of $1.36 per share, which beat the Zacks Consensus Estimate of $1.07 per share by 27.1%. Earnings were also above the guided range of 97 cents–$1.07 per share.

Adjusted earnings also grew 5% year over year owing to higher sales growth, higher-than-expected volume in net sales, lower expenses as a result of the continued focus on cost management, and a favorable impact of 5 cents due to delayed expenses that would be spent later this year. First quarter adjusted earnings were negatively impacted by 32 cents due to currency headwinds, excluding the impact of Venezuela price increases tied to foreign exchange rate movements.

Net sales of $1.119 billion grew 1.1% from the prior-year period, first time in the last five quarters. This was much better than the guided decline of 3%-6%. Excluding currency headwinds, sales grew 11% year over year, significantly higher than the company's guidance range of 2.5% to 5.5% growth. Sales also beat the Zacks Consensus Estimate of $1.041 billion by 7.5%.

This was driven by 4% growth in volumes, better than the expected range of down 1.5% to up 1.5%. In fact, this was the first time since the first quarter of 2014 that the U.S. has shown positive year-over-year volume growth in a quarter. This was also the second consecutive quarter of year-over-year volume point growth, owing to an improvement in volume trends and positive member metrics due to strategic changes made to the business model.

Regionally, China continued to outperform, recording impressive volume point growth of 36%. Europe, the Middle East and Africa reported 14% volume growth backed by the company's enhanced marketing plan, while North America recorded 7% growth and Mexico was up 6%. Volume in Asia Pacific was down 6% due to a decline in Korea, while South & Central America volume plummeted 16%.

The company has been witnessing improving volume point trends in key markets, primarily impacted by its marketing plan changes, which were implemented in Feb 2015. In fact, the company is seeing sequential improvements in key metrics in these markets and remains encouraged by the positive trends.

Second Quarter 2016 Guidance

Herbalife expects sales to be flat to up 3% and volume growth in the range of 1.5% to 4.5% in the second quarter. On a currency adjusted basis (excluding the impact of Venezuela price increases tied to foreign exchange rate movements), sales are expected to increase 5.5% - 8.5%.

For the second quarter, the company expects adjusted earnings per share in a range of $1.10 - $1.20 per share, which includes an unfavorable currency impact of approximately 20 cents per share. Excluding the currency impact (excluding the impact of Venezuela price increases tied to foreign exchange rate movements), adjusted earnings are expected in a range of $1.30 to $1.40 per share.

Full Year 2016 Guidance Raised

The company has raised its guidance for 2016 on the back of better-than-expected first quarter results. For full year 2016, the company now expects adjusted earnings in a range of $4.40 - $4.75 per share compared with $4.05 - $4.50 per share expected previously. This includes currency impact of 70 cents, down from the previously guided headwind of 80 cents. On a currency adjusted basis (excluding Venezuelan currency devaluation), earnings are expected in a range of $5.10 to $5.45 compared with the previous range of $4.85 to $5.30 per share.

Herbalife expects sales to grow in a range of 1.5% to 4.5%, compared with down 0.5% to up 2.5% expected earlier. Volumes are expected to increase 2.0% to 5.0% in 2016 compared with 1.5% to 4.5% growth expected earlier. On a currency adjusted basis (excluding Venezuelan currency devaluation), sales are expected to increase 6% to 9%, higher than 5.5% to 8.5% growth expected earlier.

Other Update

Herbalife is reportedly in advance talks with the U.S. Federal Trade Commission (‘FTC') to resolve the probe into its business practices and whether the company is a pyramid scheme. Herbalife had received a civil investigative demand in 2014 from the FTC related to the company's marketing practices.

The probe followed allegations from activist investor William Bill Ackman, hedge fund manager of Pershing Square, which made a $1 billion bet against the nutrition company in Dec 2012 and accused it of being a pyramid scheme i.e. it employs deceptive marketing practices for improving business. Ackman believes that the nutrition clubs run by Herbalife's distributors focus on recruitment instead of selling products. Herbalife, on its part, has been denying the charges since 2012 and has full confidence in its business model. However, such allegations have severely impacted its share price and investors' confidence.

Nevertheless, the recent talks with the FTC to resolve the issue have made investors optimistic and they believe that Herbalife can overcome the dispute without incurring further damage. Shares of Herbalife rose 13.17% in after-hours trading on May 5 after the news.

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.

Herbalife has a Zacks Rank #2 (Buy).

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