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What's in Store for Herbalife (HLF) This Earnings Season?

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Herbalife Ltd. (HLF - Free Report) is set to report second quarter 2015 results on Aug 5 after the market closes. Last quarter, it posted a positive earnings surprise of 29.00%.

In fact, this weight management and nutritional products company has posted positive earnings surprises in two of the last four quarters, generating an average positive earnings surprise of 11.23%.

Let's see how things are shaping up for this announcement.

Factors to Consider

For the second quarter of 2015, Herbalife expects sales to decline in the range of 10.5%- 13.5% and volumes to decrease 4.5% to 7.5%. Currency headwinds will have a negative impact of approximately 1,000 basis points on net sales growth rates in the second quarter, adjusted for Venezuela currency movements.

Organic sales (excluding Venezuelan currency devaluation) are expected to remain flat to down 3%. For the second quarter, the company expects adjusted earnings per share in the range of $1.05 to $1.15, which includes an unfavorable currency impact of approximately 40 cents per share. This is inclusive of approximately 14 cents resulting from Venezuela currency movements. Excluding currency impact, adjusted earnings are expected in the range of $1.45 to $1.55.

We note that the company is facing volume declines since the past few quarters, particularly in the Americas region, which is weighing on Herbalife’s sales. Unfavorable currency is also a major headwind for the company. In the last quarter, Herbalife reported lower-than-expected sales due to currency headwinds and volume declines. In fact, the company also lowered its net sales guidance range for 2015 due to higher-than-expected currency headwinds.

Though unfavorable currency is expected to hurt earnings in the to-be reported quarter, we are encouraged that the company is undertaking prudent measures to control costs, reduce expenses and increase efficiency in order to boost its profits. The company is also actively buying back shares, which will likely enhance its earnings.

We have also witnessed that Herbalife’s shares have been on a roller coaster ride since Dec 2012 when Ackman started accusing the company 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 recruiting instead of selling products.

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. However, this has significantly dampened investor confidence over time.

Earnings Whispers?

Our proven model does not conclusively show that Herbalife is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Earnings ESP: Earnings ESP for Herbalife is 0.00% as the Most Accurate Estimate and the Zacks Consensus Estimate stands at $1.13 per share.

Zacks Rank #3 (Hold): Herbalife’s Zacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

We caution against stocks with Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

Stocks in the retail sector that have both a positive earnings ESP and a favorable Zacks Rank are:

Campbell Soup Co. (CPB - Free Report) , with an Earnings ESP of +2.38% and a Zacks Rank #1 (Strong Buy).

Dean Foods Co. (DF - Free Report) , with an Earnings ESP of +3.85% and a Zacks Rank #2 (Buy).

The J. M. Smucker Co. (SJM - Free Report) , with an Earnings ESP of +3.28% and a Zacks Rank #3.

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