Herbalife (HLF, Financial) is a weight management and nutritional products company that develops and sells weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products, and personal care products. The marketing model of the company is similar to AVON (AVP, Financial) which I had covered recently here. Whereas Avon is struggling, Herbalife is performing relatively better on the back of success of its products marketed through same marketing model – Multi-Level Marketing, or MLM, with 80% of its business spread overseas.
The weight management and nutritional products company posted a better-than-expected first-quarter fiscal 2015 results. Let’s recap numbers and see whether this is a good investment, going forward.
First quarter recap
- Net sales in on constant currency terms grew 4% year-over-year to clock $1.10 billion, but negative impact of forex translations stung hard just as in the case of Avon and sales declined 12% year over year. A decline of 4% in volumes also added to the decline in top-line. However, the decline was less that the company’s guided range of 5% to 8%. Despite the headwinds, top-line beat consensus estimates by 4.7%.
- Regionally, China was the strongest with impressive volume point growth of 25%, followed by EMEA which recorded 13% year-over-year volume growth on the back of enhanced marketing plan, which came into effect in the region during the quarter. However, North America, Asia Pacific, Mexico and South & Central America registered year-over-year volume declines of 11%, 12%, 8% and 8%, respectively.
- First quarter earnings came in at $1.29 per share and thrashed consensus estimates by a handsome margin of around 29% and beat its own guided range of $1.00 to $1.10 per share. This was on the back of robust sales in China and effective cost management. However, earnings decline 12% year over year due to negative impact of currency translations as 80% of its business is outside the national boundary.
New product launches
Herbalife launched new products in order to bolster the product portfolio and drive sales. Launches during the quarter included:
- Formula 1 Meal Replacement shake. The company is currently developing a variety of Formula 1 Meal Replacement shakes that can be consumed hot, and it hopes that the consumption frequency will increase, going forward.
- A new digestive health product, Active Fiber Oat Apple, was launched in 24 markets as a complement to market-leading Formula 1 meal replacement line.
- Also, in the digestive health category the company bolstered its Herbal Aloe Concentrate range with the introduction of cranberry and mandarin flavors.
According to the company, product innovation initiatives the company feels will be driving growth in the long term. Also, certain marketing plan changes though will have a short-term drag but will fuel growth in the long term.
Looking ahead
For the second-quarter fiscal 2015, Herbalife expects the sales to decline in the band of 10.5%- 13.5% and volumes to decrease 4.5% to 7.5%. The forex translation headwinds will impact negatively by about 1,000 basis points, or bps, on net sales growth rates.
For the full fiscal year, the company revised its guidance downwards and net sales are expected to decline by 6.5% to 9.5% versus growth of 1% to 2% guided earlier. The downward revision had much to do with negative impact of currency movements and 1% to 4% decline in volumes.
On earnings front, things are projected to be better in the in fiscal 2015 as a result of better-than-expected first-quarter results. The company revised its full year earnings guidance upwards, and expects the same to be in the range of $4.30 to $4.60 per share versus earlier guided range of $4.10 to $4.50 per share, after correcting for negative impact of currency movements.
Bill Ackman (Trades, Portfolio) factor
Activist investor Bill Ackman (Trades, Portfolio) has been on the heels of Herbalife since 2012, alleging that company is operating pyramid scheme where focus is on enrolling recruits rather than selling products. However, Herbalife won dismissal of U.S. 'pyramid scheme' lawsuit. But, a US $15 million class action lawsuit has been granted approval by a California District court. Management said:
Herbalife welcomes the decision by the U.S. District Court for the Central District of California to grant final approval of the class action settlement in the matter of Dana Bostick v. Herbalife International of America Inc et al.
As we have consistently stated, we believe that the settlement is fair, reasonable and adequate to class members, and we note the court found that the low number of claimants was not surprising in light of the substantial survey results indicating that most people join Herbalife to become discount consumers of our products."
Wrapping up
The weight management and nutritional products company posted better-than-expected first-quarter results and have revised upwards the earnings for fiscal 2015. The stock rallied strongly after the court ruling in Herbalife’s favor.
Also, Herbalife is among the top new picks of Mark Stupfel’s Cortex Capital Management. The stock has a forward P/E of 9.41 versus trailing P/E of over 13, signifying growth in earnings. However, for the next five years, analysts expect growth to be at CAGR of miniscule 2.40%. So, if you have appetite for risk, this stock can be a better investment compared to Avon.
