Will Herbalife (HLF) Miss Earnings Estimates Again?

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Herbalife Ltd HLF is set to report third quarter 2014 results on Nov 3 after the market closes. Last quarter, it posted a negative earnings surprise of 1.27%. Let's see how things are shaping up for this announcement.

Factors to Consider This Quarter

Herbalife reported lower-than-expected sales in the last quarter due to lower volumes in the Americas. The company also slashed its sales guidance for 2014 on weak results.

For the third quarter of 2014, the company expects net sales growth in the range of 9% to 11% driven by volume growth of 5.5% to 7.5%. The sales growth rate compares unfavorably with last year's net sales increase of 19% driven by volume growth of 13%. We believe the sluggish volume growth will impact sales in the third quarter as well.

However, adjusted earnings are expected in the range of $1.49 to $1.53 per share, much higher than $1.41 per share earned in third quarter 2013 driven by increased share buyback and growth in China.

Due to a slowdown in America, the company slashed its full year sales growth in the range of 8.5% to 10.5%. Volume growth is expected in the range of 6% to 8% for 2014. We note that in 2013, net sales grew 18% driven by volume growth of 13%.

We note that estimates have been declining for this weight management and nutritional products company for the third quarter and fiscal 2014 over the past 30 days. Continuous accusations by activist investor William Bill Ackman, hedge fund manager of Pershing Square, definitely add to one of the reasons for the downtrend.

Herbalife's share prices have been on a roller coaster ride since Dec 2012 when Ackman had started accusing the company by calling it 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 recruiting 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 so far none has taken action. Last month, it was also speculated that one of the biggest shareholders and supporters of Herbalife, Carl Icahn was selling his 19% stake in the company. The news not only led the share prices to decline, but also dampened investor confidence.

Earnings Whispers?

Our proven model does not conclusively show that Herbalife is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: ESP for Herbalife is 0.00% as both the Most Accurate Estimate and the Zacks Consensus Estimate stand at $1.52 per share.

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Zacks Rank #4 (Sell): We caution against stocks with Zacks Ranks #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Other stocks in the retail sector that have both a positive earnings ESP and a favorable Zacks Rank are:

L Brands Inc. LB, with Earnings ESP of +6.25% and a Zacks Rank #2 (Buy).

The Men's Wearhouse, Inc. MW, with Earnings ESP of +2.30% and a Zacks Rank #3.

Zumiez, Inc. ZUMZ, with an Earnings ESP of +3.85% and a Zacks Rank #3 


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L BRANDS INC LB: Free Stock Analysis Report

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