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Herbalife (HLF) Q1 Earnings Miss Estimates, Stock Down 4%

Zacks Equity Research

Herbalife Nutrition Ltd. HLF posted first-quarter 2019 results, with earnings missing the Zacks Consensus Estimate after surpassing the same in the preceding five quarters. Also, the bottom line declined year on year due to higher expenses.

The top line marginally decreased from the prior-year quarter’s figure. The year-over-year decline was due to soft sales in China. Management lowered its guidance for 2019, alongside issuing a view for the second quarter.

Following the dismal results and lowered guidance, shares of Herbalife Nutrition lost more than 4% during the after-market trading session on May 2. In the past three months, shares of this Los Angeles, CA-based company have decreased approximately 14%, against the industry’s decline of 17.8%.

Detailed Look at Q1 Performance

Herbalife reported first-quarter adjusted earnings of 66 cents per share, which lagged the Zacks Consensus Estimate by a penny. Also, the bottom line declined 5.7% year on year due to expenses of approximately $0.7 million related to China Growth and the Impact Investment Program.

Net sales of $1,172.2 million slipped marginally by 0.4% year over year. Although the company posted sales growth in four out of six regions, soft sales in China hurt the top-line performance.

Herbalife LTD. Price, Consensus and EPS Surprise

Herbalife LTD. Price, Consensus and EPS Surprise | Herbalife LTD. Quote

Volume points in the reported quarter advanced 6.1% to $1,480.4 million. This marks the highest first-quarter volume points achieved by the company. Notably, the company has successfully delivered record high volume points during the fourth, the third and the second quarters of 2018. Volumes depicted growth in four of the six markets, for the fourth consecutive period in the quarter under review.

Regionally, volumes rallied 28.8% in the Asia Pacific. Volumes in this region advanced for the fifth successive quarter. Volumes in North America as a whole increased 9.1%. Further, the EMEA region witnessed its 36th straight quarter of volume point improvement, up 10.5%. Volumes in Mexico rose 1.4%.  However, volumes in China plunged 31.8%. Also, South & Central America volumes declined 9.9%.

Gross profit came in at $930.6 million, down 0.7% from the prior-year quarter’s figure. Gross margin contracted nearly 20 basis points (bps) to 79.4%, due to adverse currency impacts and changes in country mix, partially offset by higher retail pricing, decrease in inventory write-downs as well as favorable cost changes.

Further, operating income during the quarter came in at $ 163 million, up 4.6% from the prior-year quarter’s figure.

Other Financial Aspects

This Zacks Rank #3 (Hold) company ended the quarter with cash and cash equivalents of $1,209 million and long-term debt (net of current portion) of $1,775.5 million. Total shareholders’ deficit amounted to $629.1 million as of Mar 31, 2019.

Further, Herbalife generated cash flow from operating activities of $38.5 million during the first quarter of 2019.

Outlook

Management lowered its outlook for 2019 due to softness in China region. The company now anticipates net sales growth in the range of negative 1% to positive of 5%, compared to previous guidance view of rise of 4-8%. After considering currency fluctuations, sales are now projected to rise in the range of 1.1-7.1%, compared to prior view of 5.7-9.7%.

Meanwhile, volumes are expected to advance 0.5-6.5% compared to previous guidance of 4-8%. Further, adjusted earnings for 2019 are estimated in the range of $2.50-$2.95 per share, which is way below the current Zacks Consensus Estimate of $3.29. The company’s earnings view includes a negative impact of about 26 cents from adverse currency movements. It had earlier projected adjusted earnings of $2.70–$3.10 per share.

Adjusted effective tax rate for 2019 is expected between 27% and 31%. Capital expenditure is currently projected in the band of $130-$170 compared with previous view of $135-$175 million.

Q2 Guidance

For second-quarter 2019, Herbalife expects net sales growth in the range of negative 3.5% to increase 2.5%. After considering currency fluctuations, sales growth is projected in the range of minus 0.1% to plus 5.9%. Volumes are expected in the range of minus 1% to plus 5%.

Additionally, the company expects adjusted earnings per share (EPS) in the range of 65-80 cents, which is much below the Zacks Consensus Estimate of 92 cents. Management’s guidance includes a negative impact of about 8 cents from adverse currency movements. Capital expenditure for the quarter is projected in the band of $35-$45 million.

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