Herbalife misses profit target for second quarter in a row
For much of its bitter fight over its business practices in the last two years, Herbalife Ltd. has had the comfort of solid sales and growing profits at its back.
For the second straight quarter, however, the Los Angeles nutritional products company turned out surprisingly weak results and missed earnings forecasts. On Monday, it reported that its profit plummeted more than 90%, mostly on one-time charges.
Wall Street battered its shares in after-hours trading, knocking the price down more than 12%. The stock already had dropped 29% this year.
Herbalife posted a third-quarter profit of $11.2 million, or 13 cents a share, a huge drop from $142 million, or $1.32 a share, a year earlier. Sales rose 4% to $1.26 billion from $1.21 billion.
Excluding one-time charges, Herbalife earned $1.45 a share. Analysts surveyed by FactSet had estimated the company would report earnings of $1.51 a share. The company previously forecasted earnings of $1.49 to $1.53 a share.
The company attributed much of the lower profit to a re-measurement of its business in Venezuela and a $15-million settlement of a lawsuit filed by a former salesman.
Its quarterly results were released after the close of trading. Herbalife shares had gained $3.44, or 6.6%, to close at $55.90.
The company also lowered its projection for fourth-quarter earnings to $1.30 to $1.40 a share, far below prior expectations of $1.69 a share.
Herbalife has faced a bruising attack from activist investor Bill Ackman, who has argued for nearly two years that the company operates an illegal pyramid scheme and should be closed by regulators. The company has denied those allegations, saying its business model is legal and used by many other multi-level marketing companies.
Analysts and investors were awaiting Herbalife’s third-quarter results because the company had missed earnings estimates for the second quarter — the first time it had failed to hit its target since 2008.
Despite the second consecutive miss, Herbalife executives said there’s reason for optimism.
“There are ebbs and flows in every business,” Chief Financial Officer John DeSimone said. “A lot of the changes we are implementing and working through right now are going to make us a better business and build us a solid foundation for sustainable growth.”
He said the currency issues in Venezuela that dragged down third-quarter results also will affect its performance in the fourth quarter.
“We saw volume increases in two-thirds of our 91 countries, especially Russia and China,” Chief Executive Michael O. Johnson said. “Excluding the impact of currency translation in Venezuela, the company had solid increases in both volume and net sales.”
Herbalife’s earnings release came three days after the company reported that it had agreed to pay $15 million to resolve a class-action lawsuit filed by a former Los Angeles distributor who accused the company of operating a pyramid scheme that violated federal and state laws.
Herbalife did not admit wrongdoing, but said in a statement it agreed to the settlement to avoid the costs and distraction of a complex legal case and, instead, “focus on the future growth of the company.”
As part of the settlement, which still must be approved by a judge, Herbalife will set aside $15 million to reimburse independent distributors who ended up with unsold inventory after attempting to launch businesses selling the company’s products.
The settlement also calls for Herbalife to adopt 13 corporate policies to benefit its sales staff. The costs of the settlement were included in the third-quarter results.
Herbalife sells meal-replacement shake mix, vitamins, juices, teas and other nutritional products through a network of individual sales people in 91 countries. The distributors make money from sales and from sales made by others they recruit into the business.
Herbalife also has denied Ackman’s allegations that its independent distributors make more money recruiting than they do selling the product.
However, the Federal Trade Commission, the Securities and Exchange Commission, the FBI and at least two state attorneys general have opened investigations. None of them has taken action against the company so far.
Twitter: @spfeifer22
