Herbalife Misses on Q3 Earnings & Revenues, Cuts Outlook - Analyst Blog

Herbalife Ltd. (HLF) recently reported lower-than-expected third quarter 2014 results due to continued sluggish performance in the Americas. The company has also slashed its earnings and sales guidance for 2014 on weak results. Investor confidence has also been hit by continuous accusations by activist investor William Bill Ackman, hedge fund manager of Pershing Square.

This weight management and nutritional products company delivered third quarter adjusted earnings of $1.45 per share. Adjusted earnings missed the Zacks Consensus Estimate of $1.53 per share by 5.2% and also the company's guidance of $1.49-$1.53 per share due to softer sales in the quarter. Adjusted earnings, however, increased 3% year over year on the back of top-line growth.

Net sales of $1.256 billion also missed the Zacks Consensus Estimate of $1.329 billion by 5.5%. Net sales grew 3.5% from the prior-year period despite flat volumes and currency headwinds. This was, however, much lower than the company's guided range of 9% to 11% net sales growth and 5.5% to 7.5% volume growth due to continued declining volumes in the Americas.

China outperformed in the third quarter with impressive volume growth of 24%. The Chinese market is vital to Herbalife as nearly 11% of its revenues are generated from China. However, volumes declined 17% in South & Central America and 4% in North America.

Excluding Venezuela currency, net sales and volume increased 7% and 3%, respectively, in the third quarter.

Guidance

The company has slashed its full year 2014 guidance for sales and earnings due to soft third quarter results and a slowdown in the Americas region.

Soft Guidance for Full Year 2014

The company now expects sales growth in the range of 3.5% to 4.3%, lower than the prior expectation of 8.5% to 10.5% due to a slowdown in Americas. Volume growth is expected in the range of 2.7% to 3.5% for 2014 versus the prior range of 6% to 8%. We note that in 2013 net sales grew 18%, driven by volume growth of 13%.

For 2014, the company now expects adjusted earnings in the range of $5.80-$5.90 per share, much lower than the previous guidance range of $6.17-$6.32 per share. However,  the projected range is higher than the year-ago earnings of $5.37 per share.

Fourth Quarter 2014

For the fourth quarter of 2014, the company expects adjusted earnings in the range of $1.30 to $1.40 per share, much higher than $1.28 per share earned in fourth quarter 2013. Net sales are expected to decline in the range of 5% to 8%. Volume expectations range from a decline of 3% to flat volumes. However, in the year-ago quarter, net sales had increased 20%, driven by volume growth of 13%.

Guidance for the fourth quarter includes a currency headwind of approximately 31 cents, including approximately 22 cents from Venezuela.

Fiscal 2015 Guidance

For fiscal 2015, the company expects adjusted earnings in the range of $5.45 to $5.75 per share. Net sales growth is expected in the range of (1%) to 2%. Volumes are expected to be flat to up 3%. Guidance for the fiscal year includes a currency headwind of approximately 66 cents, including approximately 45 cents from Venezuela.

It should be noted that Ackman has been keeping an eye on Herbalife since Dec 2012 and accusing 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. (Read: Herbalife Faces Another Ackman Attack).

Ackman's back-to-back allegations have prompted investigations by the Securities and Exchange Commission, Federal Trade Commission, FBI and at least two state attorneys general. But none so far has taken any action. Herbalife, on its part, has been denying the charges since 2012 and has full confidence in its business model.

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 #3 (Hold).

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