Herbalife shrugs off FTC, Ackman; boosts 2017 outlook

Herbalife has shaken off the lingering effects of a big-ticket settlement with the Federal Trade Commission with a relatively solid quarterly results statement that was welcomed by stock traders.

Herbalife, the world’s fourth largest network marketing company and the largest devoted solely to selling nutritional products, recorded a 1% overall rise in year-over-year sales in its first quarter of 2017, a rise which came against a strong first quarter of the year before, the company said. The revenue figure also came against unfavorable currency conditions;  Herbalife, like many U.S.-based network marketing companies, now derives the majority of its income from overseas operations and the strong U.S. dollar has hurt. The overall revenue figure was $1.1 billion in the quarter.

Outlook improvement boosts stock price

Herbalife also solidified its outlook for the rest of of 2017.  The company is raising its previously issued reported and adjusted diluted EPS guidance to a range of $3.25 to $3.65 and $4.05 to $4.45, respectively; up from the previous ranges of $2.95 to $3.35 and $3.65 to $4.05 respectively. Herbalife’s stock closed at about $72 today, up from $62 immediately prior to the earnings announcement last week.

The stock is now near the high recorded before the company’s first run-in with a prominent activist investor, David Einhorn, who in 2012 questioned how the company accounted for sales to distributors.  His line of inquiry during an earnings call threw into question whether the company’s business model might constitute an illegal pyramid scheme.  Activist investor Bill Ackman took up that mantle, and took a $1 billion short position on the company’s stock and embarked on an unprecedented high profile publicity campaign to damage the company’s reputation. In a roller coaster ride since, the company’s stock sank as low as $27.27 a share in 2012, rose to an all-time high of $81.81 in early 2014 and plunged again into the low $30 range.  While Ackman’s attack seems to have failed, the FTC investigation did begin during that time,

Implementing FTC agreement

This is the quarter that Herbalife expected to start to really feel the effects of its agreement with FTC that the company signed in July 2016.  In addition to paying a $200 million fine, Herbalife agreed to make some thoroughgoing changes to its operations in the U.S. to put to rest the pyramid scheme allegations, changes that included changing how it categorized people who were signing up with the company merely to get discounts on the products as opposed to those who really intended to pursue the multi level marketing business opportunity.

Like many network marketing companies, Herbalife has seen domestic sales soften.  Incoming CEO Rick Goudis, who  will take over from Michael Johnson in June, said much of this had to do with the FTC agreement.

“First quarter volume points for the U.S. were down 5% compared to the prior year quarter. This was in line with our expectations and, as we previously stated, the short-term volume softness as a result of our distributors focus on preparation for the FTC implementation, which has taken away time from normal sales and business building activity,Goudis said during an earnings call with investors.  The call was posted in transcript form on the site seekingalpha.com.

The company recorded $215.6 million in reported net sales in China, which was off slightly over the same period a year before, which was an exceptionally good one for Herbalife.  But that figure was inflated by the effect of a 5% price increase in April, which induced distributors and end users to buy product in advance at the lower price.  So Herbalife officials said the second quarter will likely show year-over-year declines in China. Nevertheless, the company remains bullish on the market.

“The confidence that we take from what happened, obviously, with this pull forward because of the price increase if it's an indication of a significant engagement of our sales force in China and the strong consumer demand for our products,said president Des Walsh.