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Herbalife (HLF) Down 1.4% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Herbalife (HLF - Free Report) . Shares have lost about 1.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Herbalife due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Herbalife Posts Robust Q2 Earnings & Raises Outlook

Herbalife delivered second-quarter 2018 results, wherein adjusted earnings of 80 cents per share came way ahead of the Zacks Consensus Estimate of 68 cents and jumped 5.3% year over year. Also, the quarterly figure came ahead of the company’s guided range. The better-than-expected bottom line was backed by upbeat sales, tax gains and improved gross margin. Adjusted effective tax rate came in at 26.8%, which was lower than management’s expectations.

Net sales of $1,285.8 million advanced nearly 12% year over year and surpassed the Zacks Consensus Estimate of $1,269 million. Net sales were backed by growth across all six regions (in local currency). This could be attributable to highest ever quarterly volume recorded by the company.

Volume points advanced 12% to 1.5 billion, comfortably exceeding management’s guidance.  Notably, volumes witnessed double-digit growth in four out of the top five markets.

Regionally, volumes surged 19% in the United States, building on the favorable trends witnessed in the previous quarter. In China, Herbalife reverted to growth as volumes jumped 27%, owing to some pricing actions taken last year. Volumes increased 4% in Mexico, while in Asia-Pacific it advanced 10% on the back of improvements in 11 out of 15 markets. Markedly, the EMEA region witnessed its 33rd straight quarter of volume point improvement, with a gain of 13%. 

Gross margin expanded nearly 80 (basis points) bps to 81.7%, courtesy of higher retail pricing and lower inventory write-downs, somewhat countered by currency headwinds and higher self-manufacturing costs stemming from planned reduction in inventories.
 
Other Financial Updates

Herbalife ended the quarter with cash of $800 million, total debt of $2.2 billion and net debt of $1.4 billion. Total shareholders’ deficit amounted to $779.4 million as of Jun 30, 2018.

Further, the company generated cash flow from operating activities of approximately $345 million during the first six months of 2018.

Outlook

Management raised its earnings and volumes outlook for 2018. However, the company lowered its net sales view, owing to a 330-bp headwind expected from currency translations. Consequently, the company now anticipates net sales in 2018 to advance 8.3-12.3%, down from the previously guided range of 9-13%.

On the other hand, volumes are now expected to rise 6-9%, compared to 3-7% expected earlier. Further, adjusted earnings for 2018 are now envisioned in the range of $2.60–$2.80 per share, in comparison to the prior outlook of $2.53-$2.73. This includes a negative impact of about 13 cents from adverse currency movements.

Adjusted effective tax rate for 2018 is expected to be lower, ranging between 22% and 27%, down from the prior forecast of 23% and 28%.

Capital expenditure is now envisioned in a band of $100-$120 million, down from $110-$140 million projected earlier.

Q3

For third-quarter 2018, Herbalife expects net sales growth in a range of 9-14%, including adverse impact of roughly 300 bps from currency headwinds. Volumes are expected to rise in a range of 8.5-12.5%.

Adjusted effective tax rate for the third quarter is expected to be 27.5-34.5%.

Additionally, the company expects adjusted earnings per share to range from 58 cents to 68 cents. This includes a negative impact of about 4 cents from adverse currency movements.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months. The consensus estimate has shifted 15.31% due to these changes.

VGM Scores

At this time, Herbalife has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is equally suitable for value, growth, and momentum investors.

Outlook

Herbalife has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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