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Herbalife Ltd (HLF - Snapshot Report) recently reported impressive fourth quarter and full year 2013 results. This weight management and nutritional products company delivered fourth quarter adjusted earnings of $1.28 per share, which was in-line with the Zacks Consensus Estimate.

Earnings were also within the company’s range of $1.26-$1.30 per share, as was guided in the preliminary results on Feb 3. Adjusted earnings increased 28% year over year on the back of double-digit growth in top-line.

Net sales of $1.27 billion beat the Zacks Consensus Estimate of $1.24 billion. Net sales grew 20% from the prior-year period fueled by volume growth of 13%. This was slightly higher than the company’s guided range of 19.8% net sales growth and 12.7% volume growth. China outperformed in the fourth quarter with extraordinary volume growth of 103%.

The Chinese market is vital to Herbalife as nearly 11% of its revenues are generated from China. However, volumes declined 4% in Asia Pacific. The company believes that rising health consciousness among consumers worldwide increased the demand for Herbalife’s products.

Full Year 2013 Results

In 2013, Herbalife reported adjusted earnings of $5.37 per share. The results were in-line with the Zacks Consensus Estimate and were within the company’s guided range of $5.35-$5.39. Adjusted earnings however increased 24% year over year, driven by higher sales.

Net sales grew 18% on a year-over-year basis to $4.83 billion in 2013, driven by volume growth of 13%. However, full year revenues and volume slightly missed the company’s guided range of 18.5% and 13.1% increase, respectively.

Other Financial Details

In 2013, the company paid $123.1 million in dividends and repurchased $297.4 million of shares under the previous share repurchase program.

During the fourth quarter, the company’s board approved an increase in share repurchase authorization to $1.5 billion, 50% more than initially expected. The company currently has $814 million remaining under the previous share repurchase authorization of $1 billion.

First Quarter and Full Year 2014 Guidance

Following solid fourth quarter 2013 results, increased share buyback and growth in China, Herbalife raised its earnings guidance for first quarter and fiscal 2014.

For 2014, the company expects adjusted earnings in the range of $5.85-$6.05 per share, higher than the previous guidance range of $5.45 to $5.65. However, the company expects foreign currency to adversely impact earnings by approximately 10 cents in 2014. The company continues to expect sales growth in the range of 7.5% to 9.5%, on the back of volume growth of 6.5% to 8.5%.

For the first quarter of 2014, the company raised its adjusted earnings forecast to a range of $1.25 to $1.29 per share, up from the prior range of $1.24 to $1.28, despite currency headwinds of approximately 20 cents. For the first quarter, the company continues to expect sales growth in the range of 8.0% to 10.0% driven by volume growth of 6.5% to 8.5%.

Meanwhile, Herbalife has been facing accusations since last year by activist investor William Ackman (hedge fund manager of Pershing Square) and the Belgian consumer organization Test-Aankoop who are accusing the company of running a pyramid scheme business model i.e. deceptive marketing practices employed for improving business. The company was accused of making money by recruiting new sales people and not from its sales. However, on Dec 3, 2013, a Belgian court quashed the allegations and stated that the company’s sales model complied with Belgian law.

Nevertheless, Ackman sent a letter to its investors on Dec 24 about the improper recruiting methods adopted by Herbalife. The billionaire investor also told his clients that Herbalife is likely violating multi-level market restrictions in China.

Herbalife, on the other hand, has come out clean when in Dec 2013, Herbalife’s UK-based auditor PricewaterhouseCoopers (PwC) completed the re-audit of more than three years of financial statements and found no material changes.

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 - Snapshot Report), USANA Health Sciences Inc (USNA - Snapshot Report) and Avon Products Inc (AVP - Analyst Report) also follows the same distribution models.

We appreciate the fact that despite allegations of a pyramid scheme business model and numerous attacks on its multi-level marketing model, the company’s earnings continue to increase. This signals that the stock has potential and will continue to move higher, going ahead. Herbalife holds a Zacks Rank #2 (Buy).

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