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Why Herbalife (HLF) Q4 Earnings Failed to Impress Investors

Zacks Equity Research

Shares of Herbalife Ltd. HLF fell 4.51% after the nutritional-products company issued a weak 2017 outlook in the extended session on Feb 23. Despite posting better-than-expected earnings in fourth-quarter 2016, sales missed the consensus mark due to currency headwinds and lower volumes.

Quarter in Detail

This weight management and nutritional products company delivered fourth-quarter adjusted earnings of $1.00 per share, which beat the Zacks Consensus Estimate of 98 cents by 2.04%. Earnings touched the higher end of the management’s guided range of 80 cents to $1.00 per share. Adjusted earnings, however, declined 14.5% year over year due to an 11 cents negative impact from currency.

Net sales of $1.045 billion declined 5% from the prior-year period due to currency headwinds and volume declines. This lagged the guided range of down 2.5% to up 1.5%. In the reported quarter the company witnessed a decline in sales, after posting three consecutive quarters of growth in revenues.

Excluding currency headwinds, sales declined 1% year over year, within the company’s guidance range of down 0.5% to up 3.5%. Sales also lagged the Zacks Consensus Estimate of $1.070 billion by 2.3%.

Sales decline was also due to lower volumes. Volume declined 1% to 1.3 billion in the quarter, within the expected range of down 1.5% to up 2.5%. The decline was due to the fall in China and a difficult comparison for India and Indonesia, during the fourth quarter of last year.

Herbalife LTD. Price, Consensus and EPS Surprise

 

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

Regionally, Europe, the Middle East and Africa reported 5% volume growth, while Mexico recorded 7% growth. North America and Asia Pacific each reported volume point growth of 1%. Volume points for the US were up as the market continues to progress through the FTC implementation.

In Asia Pacific, strong performances from Vietnam, Indonesia and India were partially offset by South Korea, which was down 31% year-over-year. Volume in China declined 11% and was lower than expected, while South & Central America volume decreased 16% in the fourth quarter led by continued softness in Brazil.

Gross margins decreased 16 basis points in the quarter due to the unfavorable impact of foreign currency fluctuations partially offset by cost savings through strategic sourcing and self-manufacturing.

Coming to the share price movement, Herbalife’s shares have decreased 10.4% in the past six months, wider than the Zacks categorized Retail-Drug Stores industry’s decline of 4.5%.

2016 Results

In 2016, adjusted earnings of $4.85 per share beat the Zacks Consensus Estimate of $4.80 by 1.04%. Earnings touched the higher end of the management’s guided range of $4.65 to $4.85 per share. Adjusted earnings, however, declined 2.0% year over year due to 95 cents negative impact from currency.

Net sales of $4.488 billion remained flat from the prior-year period as currency headwinds were offset by volume gains of 5%. Net sales lagged the guided range of 1– 2% growth. Excluding currency headwinds, sales increased 6% year over year, below the company’s guidance range of 6.3–7.3% growth. Sales also lagged the Zacks Consensus Estimate of $4.513 billion by 0.55%.

Other Financial Update

Herbalife ended year 2016 with cash and cash equivalents of $844 million, long-term debt of $1,438 million, and total shareholders’ equity of $196.3 million.

During 2016, the company generated cash flow from operations of $367.3 million and incurred capital expenditure of $ 143.4 million. Additionally, the company’s total free cash inflow for the year totaled $223.9 million.

In the quarter, the company has authorized a share buyback of up to $1.5 billion over three years, replacing the prior authorization that had $233 million remaining. The company expects the combination of the new debt deal and the impact of the share repurchase program to be accretive to earnings per share in 2018.

On Feb 15, Herbalife closed its new $1.45 billion senior secured credit facility, which consists of a $150 million revolving credit facility maturing 2022 and a $1.3 billion term loan maturing 2023.

On Feb 23, Herbalife announced to form a joint venture with Tasly Holding Group, a leading Traditional Chinese Medicine (TCM) health products and services corporation. The move aims to develop and commercialize high-quality consumer health products and bring them to a global market through the Herbalife Nutrition distributor network. The proposed joint venture will likely enhance Herbalife Nutrition business to expand globally.

Full-Year 2017 Guidance Lowered

For full-year 2017, management expects adjusted earnings of $3.65−$4.05 per share, down from $4.60−$5.00 per share expected earlier and from the 2016 adjusted earnings of $4.85 per share. This includes currency impact of 50 cents, compared with 15 cents expected earlier. On a currency adjusted basis, earnings are expected in a range of $4.20 to $4.60 per share, compared with $4.75 to $5.15 per share anticipated earlier.

Herbalife now expects sales to grow in a range of 0.3–3.3%, lower from 3.5–6.5% expected earlier. Volumes are expected to increase 2.0–5.0% in 2017. On a currency adjusted basis, sales are expected to increase 3.6–6.6%, compared with 3.9–6.9% growth expected earlier.

Q1 Guidance

Herbalife expects sales to fall in the range of 5% to 9% due to a decline in volume of 1% to 5% in the first quarter. On a currency adjusted basis (excludes the impact of expenses relating to challenges to the company’s business model, the impact of non-cash interest costs associated with the company’s convertible notes, FTC settlement implementation and expenses related to regulatory inquiries), sales are expected to decline 3.2% to 7.2%.

For the first quarter 2017, the company expects adjusted earnings per share to grow in the range of 75 cents to 95 cents per share, which includes an unfavorable currency impact of approximately 10 cents per share. Excluding the currency impact, adjusted earnings are expected in a range of 85 cents to $1.05 per share.

Zacks Rank and Key Picks

Herbalife has a Zacks Rank #4 (Sell).

Some well-positioned stocks in the retail sector are Francesca's Holdings Corp. FRAN, Zumiez, Inc. ZUMZ and Genesco Inc. GCO. All the three stocks carry a Zacks Rank #2 (Buy). You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

While Francesca's Holdings has expected long-term earnings growth of 13.75%, Zumiez and Genesco have expected long-term earnings growth of 15.0% and 9.5%, respectively, for the next three to five years.

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