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Herbalife (HLF) Q2 Earnings Top, New FTC Rules Raise Concern

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Herbalife Ltd. (HLF - Free Report) delivered second-quarter 2017 adjusted earnings of $1.51 per share, beating the Zacks Consensus Estimate of $1.10 by 37.3%. Shares of this nutritional-products company declined 5.3% in the late trading session on Aug 1 to eventually close 0.02% higher. The Zacks Rank #3 (Hold) company provided a disappointing sales guidance for the full year 2017 owing to the revised stringent Federal Trade Commission (FTC) laws.

Quarter in Detail

This weight management company second-quarter earnings increased 17.1% from the prior-year quarter. Excess tax benefits, cost savings as well as shift of expenses from the second quarter to the second half of the year drove earnings. However, currency negatively impacted adjusted earnings by 8 cents, in comparison with the 4 cents negative impact expected by management.

Earnings were way ahead of management’s expectations of 95 cents to $1.15 per share (which was raised from 85 cents to $1.05 anticipated during the first quarter as the company exceeded its 80% threshold). We note that this California-based company asked to prove that 80% of its annual sales is generated from documented consumer purchases. The company outpaced the key threshold of 80% under its agreement with FTC and declared that 90% of the U.S. sales in May were documented purchases, which consisted of over three million receipted retail transactions.

Net sales of $1.10 billion marginally beat the Zacks Consensus Estimate of $1.14 billion by 0.4% but declined 5% from the prior-year period due to decline in volumes and softness in Mexico operations. Sales were also hurt as distributors are adhering to the latest protocols. New stringent FTC regulations in the U.S. (as was mentioned on Jun 4) also dented sales. This was the third consecutive quarter of sales decline, after three consecutive quarters of growth. On a constant currency basis, sales declined 3% in the quarter, which came within the management’s guidance of flat to a decline of 4%.

Sales volume declined 8% in the second quarter against 1% growth recorded in the preceding quarter. The decline met the higher end of the expected range of a decline of 4–8% (which was revised from a decline of 1–5% originally due to the amended FTC rules).

Regionally, sales volume in Europe, the Middle East and Africa (EMEA) grew 2% in the quarter. Sales volumes in all other regions fell, with North America suffering the maximum decline with 18%. South & Central America and China witnessed a decline of 14% each, followed by a 6% fall in Mexico and 1% dip in Asia Pacific. We note that sales and volumes in China were negatively impacted due to a price increase announced in Mar 2017. As a result, member purchases shifted to the first quarter instead of the second quarter this year.

While the company anticipated that results in the U.S. and China would be drab, Mexico's volume was lower than expected and declined after six straight quarters of volume growth. The company is expecting short-term volume softness due to the current transformation period, as distributors have shifted their attention from building their businesses to focusing on learning new tools and procedures, and business techniques.

The company’s shares have underperformed both the industry and the broader Retail-Wholesale sector in the last one month. The stock declined 7.3% against the industry’s improvement of 0.9% and the sector’s growth of 2.8% in the said time frame.

Other Financial Updates

Herbalife ended the quarter with cash and cash equivalents of $1.62 billion, long-term debt of $2.19 billion and total shareholders’ equity of $200.0 million.

During the six months ended Jun 30, 2017, the company generated cash flow from operations of $277.1 million and incurred capital expenditure of $45.9 million.

Since the inception of the share repurchase program, the company has purchased 4.6 million shares for approximately $299.2 million. Of this, the company purchased 1.1 million shares in the first quarter, 2.7 million in the second quarter and 800,000 shares in July. The remaining authorized capacity under the company’s $1.5 billion share repurchase program is $1.2 billion.

Full-Year 2017 Guidance Updated

For full-year 2017, management raised its earnings outlook and now expects adjusted earnings in the range of $4.30−$4.70, up from $4.10−$4.50 per share expected on Jun 4 release. The upside in the guidance reflects the strength of company’s sales generated outside the company's distributor network.

However, the new guidance is still lower than the 2016 adjusted earnings of $4.85 per share. This includes currency impact of 20 cents. On a currency adjusted basis, earnings are expected in a range of $4.50–$4.90 per share.

Herbalife now expects sales in the range of down 3% to up 2%, down from the previous expectation of 0.5–3.5% growth. Volumes are expected to be down 5% to flat growth in 2017, in comparison to the previous expectation of down 1% to up 2%. On a currency adjusted basis, sales are expected to be to down 2.7% to up 2.3%.

Q3 Guidance

Herbalife expects sales in the range of flat to a decline of 5% due to a decline in volume which ranges from 2–7% in the third quarter. Currency is expected to be neutral on sales in the quarter.

For third-quarter 2017, the company expects adjusted earnings per share to grow in the range of 65–85 cents per share, which includes an unfavorable currency impact of approximately 5 cents per share. Excluding the currency impact, adjusted earnings are expected in a range of 70–90 cents per share.

Herbalife LTD. Price, Consensus and EPS Surprise

 

Herbalife LTD. Price, Consensus and EPS Surprise | Herbalife LTD. Quote

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