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Herbalife Ltd. (HLF) Shares Rise As Q4 Earnings Beat Estimates

Herbalife Ltd. (NYSE:HLF) recently reported better-than-expected fourth-quarter 2015 results on the back of higher sales in China and improving volume trends. Shares rose about 14% in after-market trading on Feb 25.

This weight management and nutritional products company delivered fourth-quarter adjusted earnings of $1.19 per share, which beat the Zacks Consensus Estimate of 92 cents by 29.3%. Earnings were within the guided range of $1.12–$1.22 per share.

Adjusted earnings, however, declined 15.6% year over year due to currency headwinds, as a major portion of its business is spread overseas. Fourth quarter adjusted earnings were negatively impacted by 30 cents due to currency headwinds, excluding the impact of Venezuela price increases tied to foreign exchange rate movements.

Net sales of $1.098 billion declined 3.1% from the prior-year period due to currency headwinds. This was narrower than the company’s sales guidance decline of 5.5%-8.5%. Excluding currency headwinds, sales grew 9.7% year over year, higher than the company’s guidance range of 1.6% to 4.6% growth. Sales also beat the Zacks Consensus Estimate of $1.049 billion by 4.7%.

This was driven by 5% growth in volumes, better than the expected range of down 1.5% to up 1.5%, owing to an improvement in volume trends and positive member metrics due to strategic changes made to the business model. This was also the first time in five quarters that the company reported year-over-year volume point growth.

Regionally, China continued to outperform, recording impressive volume point growth of 30%. Europe, the Middle East and Africa reported 15% volume growth backed by the company’s enhanced marketing plan, while Asia Pacific recorded 2% growth and Mexico generated 4%. Volume in North America was flat and volumes declined only in South & Central America by 7%.

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

On a reported basis, gross margin was up 76 basis points in the quarter, benefiting from price increases, country mix and lower inventory reserves, which were partially offset by an unfavorable impact of approximately 122 basis points due to foreign currency.

2015 Results

In 2015, adjusted earnings were $5.00 per share, which beat the Zacks Consensus Estimate of $4.74 per share by 5.5%. Earnings however declined 15.7% year over year due to currency headwinds.

Net sales of $4.469 billion beat the Zacks Consensus Estimate of $4.429 billion by 0.9% but declined 10% from the prior-year period due to currency headwinds. Excluding currency headwinds, sales grew 5% year over year.

First Quarter 2016 Guidance

Herbalife expects sales to decline in the range of 3%-6% and volumes to be in the range of down 1.5% to up 1.5% in the first quarter. On a currency adjusted basis (excluding the impact of Venezuela price increases tied to foreign exchange rate movements), sales are expected to increase 2.5% – 5.5%.

For the first quarter, the company expects adjusted earnings per share in the range of 97 cents to $1.07 per share, which includes an unfavorable currency impact of approximately 27 cents per share. Excluding currency impact (excluding the impact of Venezuela price increases tied to foreign exchange rate movements), adjusted earnings are expected in the range of $1.24 to $1.34 per share.

Full Year 2016 Guidance Revised

For full year 2016, the company now expects adjusted earnings in the range of $4.05 – $4.50 per share compared with $4.35 – $4.75 per share expected previously. This includes currency impact of 80 cents, up from the previous guided headwind of 50 cents. On a currency adjusted basis (excluding Venezuelan currency devaluation), earnings are expected in the range of $4.85 to $5.30 compared with the previous range of $4.85 to $5.25 per share.

Herbalife expects sales in the range of down 0.5% to 2.5%, compared with 4.5% to 7.5% expected earlier in 2016. Volumes are expected to increase 1.5% to 4.5% in 2016 versus 2.5% to 5.5% growth expected earlier. On a currency adjusted basis (excluding Venezuelan currency devaluation), sales are expected to increase 5.5% to 8.5%, lower than 7% to 10% growth expected earlier. This guidance is significantly lower than the previous forecast due to currency headwinds.

Other Update

Herbalife is reportedly in talks with the U.S. Federal Trade Commission (‘FTC’) about resolving a probe into 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 sent waves of optimism among investors that Herbalife can overcome the dispute without incurring further damage.