A month has gone by since the last earnings report for Herbalife (HLF - Free Report) . Shares have added about 3.6% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Herbalife due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Herbalife Q3 Earnings Top Estimates, Volumes Up Y/Y
Herbalife Nutrition posted third-quarter 2018 results, with the top and the bottom line improving year over year and beating the Zacks Consensus Estimate for the fourth consecutive time. Further, the company sustained its strong volume points surge. This encouraged management to raise volumes outlook and increase earnings view for 2018.
A Closer Look at Q3 Performance
Adjusted earnings of 74 cents per share came ahead of the Zacks Consensus Estimate of 66 cents and surged 80.5% year over year. Also, the figure surpassed the company’s projected range. The upside can be attributed to upbeat sales and improved gross margin. Adjusted effective tax rate came in at 32.2%, which was in line with management’s expectations.
Net sales of $1,242.8 million advanced nearly 14.5% year over year and surpassed the Zacks Consensus Estimate of $1,226 million. The top line was backed by sales growth in five out six regions. Moreover, the quarterly results benefited from strong volume point advancement.
Notably, volume points advanced 15% to 1,506.9 million, exceeding management’s projections. This marks the second highest volume points achieved by the company, following second-quarter 2018 as well as highest year-on-year volume points growth since 2012. Additionally, volumes depicted double-digit growth in four of the top five markets, for the second consecutive period.
Regionally, volumes surged 19% in the United States, courtesy of favorable trends in the previous quarters. Volumes in North America as a whole increased 18.3%. In China, Herbalife’s volumes jumped 19.6%, owing to gains from the future star promotion. Volumes increased 9.2% in Mexico. In Asia-Pacific, volumes advanced 24.3% marking an all-time record-high performance. The Asia-Pacific region depicted improvements in 12 out of 15 markets, led by India. Further, the EMEA region witnessed its 34th straight quarter of volume point improvement, with a gain of 17.1%. However, in South & Central America volumes declined 8%.
Gross profit came in at $1,024.7 million, up 17.8% from the prior-year quarter’s figure. Moreover, gross margin expanded nearly 230 basis points (bps) to 82.5%, courtesy of higher retail pricing as well as favorable cost-changes in self-manufacturing and sourcing. These were countered by currency headwinds. Further, operating income during the quarter came in at $187.3 million, depicting growth of 57% from the prior-year quarter’s tally.
Other Financial Updates
Herbalife ended the quarter with cash of $1,110.5 million and long-term debt (net of current portion) of $1,774.4 million. Total shareholders’ deficit amounted to $761.1 million as of Sep 30, 2018.
Further, the company generated cash flow from operating activities of approximately $509.7 million during the first nine months of 2018.
The company announced a five-year share repurchase plan worth $1.5 billion.
Management raised earnings and volumes outlook for 2018 along with updating sales view. Consequently, the company anticipates net sales in 2018 to advance 9.9-10.9% compared with the previous range of 8.3-12.3%. The revised sales view includes adverse currency impacts of approximately 70 bps.
Meanwhile, volumes are expected to rise 8.6-9.6% compared with the previous projection of 6-9%. Further, adjusted earnings for 2018 estimated in the range of $2.74–$2.84 per share compared with the prior outlook of $2.60–$2.80. This includes a negative impact of about 7 cents from adverse currency movements.
Adjusted effective tax rate for 2018 is expected between 25.2% and 27.2%.
Capital expenditure is now envisioned in a band of $85-$95 million, down from $100-$120 million projected earlier.
For fourth-quarter 2018, Herbalife expects net sales growth in the range of 6.5-10.5%, including adverse impact of roughly 500 bps from currency headwinds. Volumes are expected to rise in a range of 8-12%.
Adjusted effective tax rate for the fourth quarter is expected to be 30-40%.
Additionally, the company expects adjusted earnings per share (EPS) in the range of 50-60 cents. This includes a negative impact of about 8 cents from adverse currency movements.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -6.15% due to these changes.
Currently, Herbalife has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Herbalife has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.