Herbalife (HLF) Stock Down on Q3 Earnings Plunge & View Cut

Herbalife Ltd. HLF delivered third-quarter 2017 results, wherein both top and bottom lines declined year over year. Further, earnings came in line with the Zacks Consensus Estimate, after beating the same for 11 consecutive quarters. Management curtailed its outlook for 2017, which weighed upon investors’ sentiment. Evidently, shares of this nutritional-products company dropped about 6% in yesterday’s after-market trading session.

However, this Zacks Rank #3 (Hold) company has surged 46.3% so far this year, largely attributable to its impressive earnings surprise history. Further, Herbalife’s stock price performance fared better than the industry, which declined 16.5% in the same period. Thus, let’s delve deeper and see if yesterday’s outcome can turn the tables for the stock, or will Herbalife’s growth initiatives keep it going.

Quarter in Detail

Adjusted earnings of 82 cents per share came in line with the Zacks Consensus Estimate, though it slumped 32.2% year over year. Also, the quarterly figure was close to the lower end of the company’s recently updated guidance of 80-90 cents for the third quarter. On a GAAP basis, earnings came in at 66 cents per share, down from $1.01 reported in the year-ago period.

Increased interest expense, lower volumes and shift of certain promotional event related expenses from the second quarter to the second half of the year weighed upon the bottom line. Further, currency had a negative impact on the bottom line and margins. Evidently, gross margin contracted 120 bps to 80.2% on account of the aforementioned expense shift and unfavorable currency translations.

Owing to soft volumes, net sales of $1,085.4 million slipped 3.3% year over year and came slightly below the Zacks Consensus Estimate of $1,086 million. The sales shortfall was within management’s updated guidance range of 1.9-3.4%. On a constant currency basis, sales fell 4%. Well, this was the fourth consecutive quarter of year-over-year top-line decline.

Volumes slid 5.6% in the third quarter, compared with an 8% drop recorded in the preceding quarter. Regionally, volumes in Europe, the Middle East and Africa (EMEA) and Asia Pacific climbed 2.7% and 1% respectively. Sales volumes in all other regions fell, with North America suffering the maximum plunge of 16.1%. Volumes at Mexico tumbled 9%, while South & Central America and China witnessed volume declines of 6.8% and 3.5%, respectively.

While the company anticipated that results in the United States and China would be drab, Mexico's volume was lower than expected yet again. This mainly stemmed from the fact that Mexico generates significant business from the areas that were affected by earthquakes. Management stated that this natural disaster hurt Mexican volumes by 200 bps in the quarter and the impact also lingered into early fourth quarter.

As for the United States, volume decline improved on a sequential basis, thanks to the implementation of its strategic plan earlier this year, including programs to boost activity. Management expects these efforts to lead to volume growth in North America in the second quarter of 2018, once the changes are annualized. In China, volumes continued being troubled by government’s limits on firms to conduct meetings, thus restricting distributor activities.

Other Financial Updates

Herbalife ended the quarter with cash and cash equivalents of $1,636.3 million, long-term debt of $2,176.6 million and total shareholders’ equity of $219 million.

During the nine months ended Sep 30, 2017, the company generated cash flow from operations of $404.4 million and incurred capital expenditure of $67.9 million.

Since the inception of the buyback program approved earlier in the year, the company has bought back nearly 11.3 million shares for approximately $757 million. Following this, the company had shares worth $743 remaining for buyback under its $1.5 billion program.

Further, Herbalife concluded a tender offer for nearly 6.7 million shares for a total of roughly $457.8 million, including the CVR per share. Notably, these shares formed 7.2% of the company’s total outstanding shares.

Outlook

With 2017 being a transformation year for the company, Herbalife remains focused on implementing new technologies; shifting its distributors’ focus toward learning latest tools and business methods; undertaking innovations and launching new products. The company is progressing well with this strategic plan, and expects to witness improved trends this year, and attain growth in 2018.

2017

For full-year 2017, management trimmed its sales and earnings outlook. Herbalife now expects sales to decline in the range of 1.9-0.6%. Earlier sales growth was anticipated in a band of down 3% to up 2%. On a currency adjusted basis, sales are expected to fall 2.1% to 0.8%, compared with down 2.7% to up 2.3% expected earlier. Volumes are now expected to be down 4.2% to 2.9%, compared with 5% to flat growth forecasted earlier.

Consequently, management now expects adjusted earnings in the range of $4.42-$4.62, compared with $4.30-$4.70 per share expected earlier. The consensus mark is currently pegged at $4.60, and the updated guidance remains lower than the 2016 adjusted earnings of $4.85 per share. This includes a negative currency impact of 20 cents. On a currency adjusted basis, adjusted earnings are expected in a range of $4.62-$4.82 per share.

Q4

Herbalife expects sales to grow in a range of 2.3-7.3%, while volume growth is envisioned in a band of decline 4% to up 1%. On a currency neutral basis, sales growth is expected to range from 0.7% dip to 4.3% increase.

For fourth-quarter 2017, the company expects adjusted earnings per share to range from 84 cents-$1.04. Excluding the currency impact, adjusted earnings are expected in a range of 80 cents-$1.00 per share. The consensus mark is pegged at $1.02.

2018

Management also provided an initial view for 2018, wherein it expects net sales to jump 5.5-9.5% (up 4.3-8.3% on a currency neutral basis). Volumes are expected to grow 2-6%. Finally, management expects the bottom line to come in a band of $4.60 to $5.00 per share, much lower than the current Zacks Consensus Estimate of $5.65. Currency-neutral earnings are likely to range from $4.50-$4.90 per share.

Notably, capital expenditure is envisioned in a band of $20 to $40 million for fourth-quarter 2017, $88-$108 million for full year 2017 and $115-$155 million for 2018.

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