Herbalife Ltd.HLF recently reported better-than-expected second-quarter 2015 results on the back of higher sales in China and prudent expense management. The company also raised its earnings guidance for 2015, despite currency headwinds.
This weight management and nutritional products company delivered second-quarter adjusted earnings of $1.24 per share, which beat the Zacks Consensus Estimate of $1.13 by 9.7%. Earnings were also above the guidance range of $1.05–$1.15 per share.
Adjusted earnings, however, declined 20% year over year due to currency headwinds, as approximately 80% of its business is spread overseas. Second quarter adjusted earnings were negatively impacted by 41 cents due to currency headwinds, inclusive of the devaluation of the Venezuelan bolivar.
Net sales of $1.162 billion declined 11% from the prior-year period due to currency headwinds and a 5% decline in volumes. Sales however beat the Zacks Consensus Estimate of $1.148 billion by 1.2%. The year-over-year decline was within the company’s expectation of a decline of 10.5% to 13.5%. The volume decline was also within the expected range of 4.5% to 7.5%. Excluding currency headwinds, sales grew 1% year over year as against the company’s guidance range of flat to down 3%.
Regionally, Europe, the Middle East and Africa reported 4% volume growth backed by the company’s enhanced marketing plan. China continued to outperform, recording impressive volume point growth of 38%. However, volumes declined in North America, Asia Pacific, Mexico and South & Central America by 9%, 15%, 5% and 16%, respectively.
In the second quarter, the company saw volume point trends improve in three of the four key markets most impacted by its marketing plan changes – the U.S., Mexico and Brazil. In fact, the company is seeing sequential improvements in key metrics in these markets and remains encouraged by the positive trends.
Third-Quarter 2015 Guidance
Herbalife expects sales to decline in the range of 7%- 10% and volumes to decrease 1% to 4% in the third quarter. Venezuela currency movements will have a negative impact of approximately 5 percentage points on net sales growth rate in the third quarter.
Organic sales (excluding Venezuelan currency devaluation) are expected to increase 1% – 4%. For the third quarter, the company expects adjusted earnings per share in the range of $1.00 to $1.10, which includes an unfavorable currency impact of approximately 40 cents per share, inclusive of approximately 13 cents resulting from Venezuela currency movements. Excluding currency impact, adjusted earnings are expected in the range of $1.40 to $1.50 per share.
Raised Full Year Earnings Guidance
Following better-than-expected second quarter 2015 results, improved volume trends and cost control measures, Herbalife raised its earnings guidance range for the full year. We note that this is the second time Herbalife has raised its earnings guidance in 2015.
The new guidance reflects the company’s positive outlook for the near term, as a result of strategic decisions company taken to improve the business and tremendous leadership by all the senior sales leaders. The company anticipates that these important and effective changes will in turn improve volume growth later this year.
It now expects adjusted earnings in the range of $4.50 to $4.70, up from $4.30 to $4.60 per share. This includes currency headwinds of approximately $1.40 per share (higher from the previous guidance of $1.26 per share), inclusive of 45 cents for Venezuela currency movements (unchanged from the previous guidance). On a currency adjusted basis, earnings are expected in the range of $5.90 to $6.10 per share compared with $5.55 to $5.85 per share, guided previously.
However, the company has reiterated its net sales guidance range for 2015. Herbalife continues to expect sales to decline in the range of 6.5% to 9.5%. Currency headwinds will have a negative impact of approximately 1000 basis points on net sales growth rates in the full year, adjusted for Venezuela currency movements. Volumes are expected to be down 1% to 4%. Organic sales (excluding Venezuelan currency devaluation) are expected to decline 0.5% to increase 2.5%.
Ackman Impact
Herbalife’s shares have been on a roller coaster ride as they are significantly impacted by allegations by activist investor William Bill Ackman, hedge fund manager of Pershing Square.
Ackman has been keeping an eye on Herbalife since Dec 2012, 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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