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Herbalife Misses on Q2 Earnings, Revenues; Cuts Sales Outlook

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Herbalife Ltd. (HLF - Free Report) recently reported soft second quarter 2014 results due to lower-than-expected sales. The company has also slashed its sales guidance for 2014 on weak results. Shares dipped 11% in pre-market trading, as investor confidence was dampened by continuous accusations by activist investor William Bill Ackman, hedge fund manager of Pershing Square.

This weight management and nutritional products company delivered second quarter adjusted earnings of $1.55 per share. Adjusted earnings missed the Zacks Consensus Estimate of $1.57 per share by 1.3% due to softer sales results in the quarter.

Earnings were at the higher end of the company’s guidance of $1.51-$1.55 per share, announced during first quarter results. Adjusted earnings increased 10% year over year on the back of top-line growth and increased share buybacks.

Net sales of $1.306 billion also missed the Zacks Consensus Estimate of $1.364 billion. Net sales grew 7.1% from the prior-year period fueled by volume growth of 5%. This was however lower than the company’s guided range of 10.0% to 12.0% net sales growth and 7% to 9% volume growth, due to lower volume growth in the Americas.

China outperformed in the second quarter with impressive volume growth of 38%. The Chinese market is vital to Herbalife as nearly 11% of its revenues are generated from China. However, volumes declined 7% in South & Central America.

Other Financial Details

In the second quarter of 2014, the company repurchased 9.8 million shares for $581.3 million. Currently, the company has $232.9 million worth of shares available under the share repurchase program of $1.5 billion.

Soft Guidance for Full Year 2014

Due to a slowdown in America region, the company now expects sales growth in the range of 8.5% to 10.5%, lower than the prior expectation of 10.0% to 12.0% due to a slowdown in Americas. Volume growth is expected in the range of 6% to 8% for 2014 versus the prior range of 8% to 10%. We note that in 2013, net sales grew 18% driven by volume growth of 13%.

However, Herbalife raised its earnings guidance for full year 2014 driven by increased share buyback and growth in China. For 2014, the company expects adjusted earnings in the range of $6.17-$6.32 per share, higher than the previous guidance range of $6.10 to $6.30. It is also higher than the year-ago earnings of $5.37 per share.

Third Quarter 2014

For the third quarter of 2014, the company expects adjusted earnings in the range of $1.49 to $1.53 per share, much higher than $1.41 per share earned in third quarter 2013. Net sales growth is expected in the range of 9.0% to 11.0% driven by volume growth of 5.5% to 7.5%. However, in the last year quarter, net sales grew 19% driven by volume growth of 13%.

It should be noted that Ackman has been keeping an eye on Herbalife since Dec 2012 and accusing it by calling it 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 recruiting 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 - Free Report) , USANA Health Sciences Inc. and Avon Products Inc. (AVP - Free Report) also follow the same distribution model.

Herbalife holds a Zacks Rank #2 (Buy).

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