Herbalife’s Stock Plunges on Earnings and Revenue Miss

Rejig of top brass with COO Richard Goudis taking over as CEO from June 1st, 2017

h1Nutrition company Herbalife Ltd. (NYSE: HLF) announced its Q3 FY16 financial results on November 1st, 2016.

The Los Angeles-based company develops and sells weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products exclusively through Herbalife Independent Members in more than 94 countries. It offers science-based products in four principal categories: weight management; targeted nutrition; energy, sports, and fitness; and outer nutrition. Herbalife also sponsors more than 190 world-class athletes, teams and events around the globe, including Cristiano Ronaldo, the LA Galaxy, and champions in many other sports. The company has over 8,000 employees worldwide, and it clocked net sales of $4.5 billion in 2015. Read more about Herbalife’s financial results below.

Q3 FY16 financial highlights

During Q3 FY16, Herbalife’s reported sales rose 2% Y-o-Y to $1.12 billion, lower than forecasts of $1.14 billion. Net sales, excluding the impact of currency, grew by 5% Y-o-Y. The company’s volume points rose 6% to $1.38 billion as compared to the year-ago period.

On a reported basis, Herbalife’s Q3 FY16 net income fell to $87.7 million, or $1.01 per diluted share, compared to net income of $93.6 million, or $1.09 per diluted share, in the year-ago period. Adjusted diluted EPS for the reporting quarter was $1.21 compared to $1.26 in the year-ago period. Due to currency fluctuations, Herbalife’s Q3 FY16 reported and adjusted net income were each negatively impacted by $17.9 million, and reported diluted EPS and adjusted diluted EPS were each negatively impacted by $0.21.

Segmental highlights

h2In terms of regional volume point for Q3 FY16, North America reported 9% growth in volume point to $311.6 million, Asia/Pacific reported 7% growth to $275.9 million, EMEA reported 15% growth to $252.0 million, Mexico reported 13% growth to $234.5 million, and China reported 2% growth to $153.2 million. On the other hand, South and Central America reported a 15% decline in volume point to $161.1 million during the reporting quarter.

In terms of regional net sales for Q3 FY16, North America reported a 10% growth in net sales to $241 million, and a 10% growth excluding foreign exchange impact. Asia/Pacific reported 3% growth to $231.4 million, and 1% growth excluding foreign exchange impact. EMEA reported 10% growth to $201.6 million, and 15% growth excluding foreign exchange impact. On the other hand, Mexico reported a 1% decline in net sales to $112.8 million, and 14% growth excluding foreign exchange impact. China’s net sales fell 5% to $214.2 million, and grew 1% excluding foreign exchange impact. South and Central America reported a 12% decline in net sales to $121.0 million, and a 9% decline excluding foreign exchange impact during the reporting quarter.

Other highlights

h3CEO Michael Johnson to step down: Herbalife announced on November 1st, 2016, that COO Richard Goudis will take over as CEO of the Company with effect from June 1st, 2017. Goudis, 55, will replace Michael Johnson, 62, who has been CEO since 2003. Goudis was CFO for Herbalife from 2004 to 2009 and has been the company’s operating chief since 2010. Johnson will remain head of the board, but will take the title of Executive Chairman.

As COO of Herbalife since 2010, Mr. Goudis has been responsible for Worldwide Manufacturing Operations, Product Development, Quality, Supply Chain, Human Resources, Information Technology, Security and regional Finance and operations functions. During this tenure, the Company expanded its Herbalife Innovation and Manufacturing facilities to five locations around the world and now manufactures more than 70% of all products in-house. Under Mr. Goudis’ management, Herbalife Nutrition also grew its employee base to more than 8,000 people worldwide.

h4Deal with Federal Trade Commission (FTC): On July 15th, 2016, Herbalife announced that it has reached a $200 million settlement with the FTC, which began investigating the company after prodding by billionaire hedge fund manager Bill Ackman, who accused Herbalife of being a pyramid scheme. Ackman had what is known as a “short” position in Herbalife’s stock, which meant that his firm, Pershing Square Capital Management, will profit handsomely if the stock plummets. For more than a year, Ackman was in a high-stakes battle with Herbalife, trying to persuade the public and key decision makers that the company is a pyramid scheme that preys on its sales force.

Things turned awkward when Carl Icahn, another billionaire investor, defended Herbalife’s and became its highest-profile backer. He is also currently the company’s biggest shareholder. After reaching a settlement with the FTC, Herbalife has agreed to make widespread changes to settle claims that it deceived consumers with get-rich-quick promises, with Goudis expected to take on the important role of reshaping the Company’s operations and repair its damaged reputation.

Launch of Herbalife SKIN® Clearify™ products: On October 6th, 2016, Herbalife launched the Herbalife SKIN® Clearify™ product line to help treat acne, blemishes, blackheads and whiteheads. This treatment delivers results in four to eight weeks and the products contain fresh scented botanicals, such as aloe and orange oil.

h5Acne, the most common skin condition in the U.S., affects up to 50 million people annually, according to the American Academy of Dermatology. The Herbalife SKIN® Clearify™ line is a dermatologist-tested treatment aimed at consumers who are experiencing acne problems. The product line includes a cleanser to reduce acne’s severity, a moisturizer to heal the skin, a mask to penetrate pores and eliminate most blemishes, and a spot treatment to dry pimples.

The four products can be purchased individually or in a kit containing full-size products of the entire treatment line for $70.25. The active ingredient in the Herbalife SKIN® Clearify™ line is salicylic acid, which has been approved by the U.S. Food and Drug Administration and is on the World Health Organization’s Model List of Essential Medicines. None of the products contain sulfates or parabens.

Outlook for full year FY16

For the full year FY16, Herbalife revised upwards its earnings forecast. It now expects adjusted diluted EPS of $4.65 to $4.85 a share, excluding some items, up from a previous range of $4.50 to $4.80. The company expects full year FY16 GAAP diluted EPS guidance in a range of $2.77 to $2.97, an increase from the previous range of $2.30 to $2.60.

Herbalife also provided initial full year FY17 volume point guidance range of 2% to 5% growth and initial full year FY17 GAAP diluted and adjusted diluted EPS guidance in a range of $3.95 to $4.35 and $4.60 to $5.00, respectively, each of which will include expected currency fluctuations headwind of $0.15.

Stock Performance

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Herbalife’s stock finished the day at $55.46, declining 6.19%, at the close on Wednesday, November 2nd, 2016, having vacillated between an intraday high of $57.25 and a low of $51.88 during the session. The stock’s trading volume was at 10,207,022 for the day. The Company’s market cap was at $5.16 billion as of Wednesday’s close.

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