Zacks Investment Research downgraded Herbalife Ltd. (HLF) to a Zacks Rank #5 (Strong Sell) on Dec 30 due to downward estimates revision resulting from lower-than-expected third quarter 2014 results reported on Nov 3. This weight management and nutritional products company also slashed its earnings and sales guidance for 2014 on weak results.
Investor confidence has also been hit by continuous accusations by activist investor Bill Ackman, hedge fund manager of Pershing Square.
Why the Downgrade?
Though Herbalife posted year-over-year increase in both earnings and revenues, it missed the Zacks Consensus Estimate on both counts.
Third quarter adjusted earnings of $1.45 per share missed the Zacks Consensus Estimate of $1.53 by 5.2% and also the company’s guidance of $1.49 to $1.53 per share due to soft sales in the quarter.
Net sales of $1.256 billion also missed the Zacks Consensus Estimate of $1.329 billion by 5.5%, due to flat volumes and currency headwinds. Revenue growth was much lower than the company’s guided range of 9% to 11% net sales growth. Volumes also fell short of expectations due to continued declining volumes in the Americas. The company had guided 5.5% to 7.5% growth in volumes.
Though performance in China improved in the third quarter, volumes declined 17% in South & Central America and 4% in North America.
Soft Guidance for Full Year 2014
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.
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 the 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.
Probes Hurting Herbalife Reputation
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. Ackman reportedly stated that he has evidence in the form of videos to back his allegations against Herbalife. (Read: Herbalife Hits 52-Week Low on Ackman's Fresh Accusations)
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. Though none so far has taken any action, the accusations have immensely impacted the share price, which has tumbled nearly 50% year-to-date. We therefore remain unsure about its long-term prospects due to Ackman’s continuous attacks on Herbalife’s business model.
However, 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.
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