Currency headwinds
As sales slow in North America, Herbalife becomes more exposed to the vicissitudes of the currency markets, which are driven by forces outside the company’s control such as oil prices and political turbulence. Herbalife says 82% of its net sales for 2014 (Herbalife’s fiscal year is aligned with the calendar year) were generated outside of the US. The more than 60% devaluation of the Venezuelan bolivar has significantly impacted Herbalife’s business and the strengthening US dollar was a concern, too.
In the case of Venezuela, like other companies doing there Herbalife essentially saw all profits disappear in the devaluation, which took place in mid 2014. Venezuela has been hard hit by the steep drop in oil prices, which is the country’s prime source of foreign exchange earnings. That, coupled with the political isolation of the country resulting from the confrontational policies of former president Hugo Chavez, left the current administration with few other options toward servicing the country’s debt.
“A strong foreign exchange headwinds facing all global businesses also affected our results for 2014 and our guidance for 2015. These impacts were felt most acutely in the fourth quarter, where net sales of $1.1 billion were 11% below the fourth quarter of the last year including the effect of currency. On a constant currency basis, net sales were flat and volume points for the quarter were down 6%,” Herbalife CEO Michael Johnson told analysts in an earnings call that was transcripted by the site seekingalpha.com.
North American weakness
In North America, where Herbalife banks results in more stable US dollars, the company has shown continued sales weakness, a trend that has continued for a number of quarters now. This is a trend noted in the earnings reports of other multilevel marketing companies selling nutritional products, most notably Usana. Whether this is the result of the softness seen in the North American dietary supplements in general or is a side effect of the negative publicity generated by Ackman in his attempt to make his $1 billion short position bet against the company pay off is anybody’s guess. Net sales in North America declined by 3%, to $204 million in the quarter. Sales were also down in Asia, excluding China, Mexico and Brazil.
Sales in China were a continued bright spot, rising by 19% on a local currency basis in the fourth quarter and 41% for the year over all, essentially rescuing the company’s overall earnings for 2014, which came in at $4.96 billion a rise of 8% excluding the foreign exchange effects.
Herbalife cut its 2015 fiscal year earnings guidance to $4.10 to $4.50 per share, which includes the currency headwind of approximately $1.19, down from the company's November forecast for 2015 profit of as much as $5.75. Net sales growth for this year is expected between 6% and 9% versus 2014. In response to missing earnings targets for 2014 the company cut Johnson’s pay from $10.5 million to $6.7 million. The markets responded by sending the company’s shares lower. Herbalife shares are now trading in the low 30s after hitting a high of more than $61 in mid 2014.
Manufacturing diversification as currency strategy
Part of Herbalife’s strategy to diversify its manufacturing has been to hedge against currency fluctuations, said CFO John de Simone.
“Most of our product that we sell in Europe is made in Europe and denominated in euros, so there's somewhat of a natural hedge there. About 60% of our product that's sold in Brazil, is made in Brazil, and then in China – all products sold in China are made in China; and India, most of the products sold in India are made in India. A lot of the remaining product is actually made in the U.S. and denominated in dollars, and that creates a transaction risk,” he said.