Herbalife Ltd.(HLF Quick QuoteHLF - Free Report) reported better-than-expected second-quarter 2016 results on the back of higher sales, improving volume trends and renewed optimism after the U.S. Federal Trade Commission (“FTC”) probe stated that the company is not a pyramid scheme. Herbalife also raised its view for full-year 2016. The company’s shares gained 0.37% on Aug 3.

This weight management and nutritional products company delivered second-quarter adjusted earnings of $1.29 per share, which beat the Zacks Consensus Estimate of $1.17 by 10.3%. Earnings were ahead of the guided range of $1.10–$1.20 per share.

Adjusted earnings also grew 4% year over year, buoyed by higher sales growth, higher-than- expected volume in net sales and lower expenses as a result of the continued focus on cost management. Second-quarter adjusted earnings were negatively impacted by 31 cents due to currency headwinds, excluding the impact of Venezuela price increases tied to foreign exchange rate movements.

Net sales of $1.201 billion grew 3% from the prior-year period. This was at the higher end of the guided range of flat to up 3%. This marked the second consecutive quarter of year-over-year net sales growth despite ongoing currency headwinds. Excluding currency headwinds, sales rose 10% year over year, significantly higher than the company’s guidance range of 5.5% to 8.5% growth. Sales also marginally beat the Zacks Consensus Estimate of $1.193 billion by 0.7%.

The improvement in the top line was driven by 9% growth in volumes, better than the expected range of 1.5% to 4.5%. This was the first time that Herbalife recorded higher volume points in five out of the six regions. The year-over-year volume point growth resulted from an improvement in volume trends and positive member metrics due to strategic changes made to the business model.

Regionally, Europe, the Middle East and Africa reported 21% volume growth, backed by the company’s enhanced marketing plan, while North America recorded 14% growth. China and Mexico both reported impressive volume point growth of 10%. Volume in Asia Pacific was up 2%. However, South & Central America volume plummeted 7% in the second quarter.

The company has been witnessing improving volume point trends in key markets, primarily impacted by its marketing plan changes, which were implemented in Feb 2015. In fact, the company is seeing sequential improvements in key metrics in these markets and remains encouraged by the positive trends.

HERBALIFE LTD Price and Consensus

HERBALIFE LTD Price and Consensus | HERBALIFE LTD Quote

Third-Quarter 2016 Guidance

Herbalife expects sales to be up 2% to 5% and volume growth in the range of 5% to 8% in the third quarter. On a currency adjusted basis (excluding the impact of Venezuela price increases tied to foreign exchange rate movements), sales are expected to increase 5.5% to 8.5%.

For the third quarter, the company expects adjusted earnings per share in a range of 98 cents to $1.08 per share, which includes an unfavorable currency impact of approximately 14 cents per share. Excluding the currency impact (excluding the impact of Venezuela price increases tied to foreign exchange rate movements), adjusted earnings are expected in a range of $1.12 to $1.22 per share.

Full-Year 2016 Guidance Raised

The company has raised its guidance for 2016 on the back of better-than-expected second-quarter volume results. For full-year 2016, the company now expects adjusted earnings in a range of $4.50−$4.80 per share compared with $4.40−$4.75 expected previously. This includes currency impact of 90 cents, up from the previously guided headwind of 70 cents. On a currency adjusted basis (excluding Venezuelan currency devaluation), earnings are expected in a range of $5.40 to $5.70 per share compared with the previous range of $5.10 to $5.45.

Herbalife continues to expect sales to grow in a range of 1.5% to 4.5%. Volumes are expected to increase 4.5% to 7.5% in 2016 compared with 2.0% to 5.0% growth expected earlier. On a currency adjusted basis (excluding Venezuelan currency devaluation), sales are expected to increase 7% to 10%, higher than 6% to 9% growth expected earlier.

Other Update

Herbalife has recently resolved the probe with the FTC and the Illinois Attorney General. The FTC stated that Herbalife is not a pyramid scheme, though the company paid it $203 million as charges. Herbalife had received a civil investigative demand in 2014 from the FTC related to its 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 believed 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. The recent settlement with the FTC has made investors optimistic.

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 Quick QuoteNUS - Free Report) , USANA Health Sciences Inc. (USNA Quick QuoteUSNA - Free Report) and Avon Products Inc. also follow the same distribution model.

Herbalife has a Zacks Rank #3 (Hold).

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