Herbalife shares plunge 20.8% after firm reports steep drop in profit
Investors punished shares of Herbalife Ltd. after the Los Angeles nutritional products company reported a steep decline in profit for the third quarter and lowered its expectations for the last three months.
Shares of the company’s stock fell 20.8% on Tuesday, losing $11.64 to close at $44.26.
The beating came a day after Herbalife said its profit plummeted more than 90% in the third quarter, much of that from a terrible currency exchange rate in Venezuela. It released its quarterly results after the market closed Monday.
Adding to the bad news Tuesday, an analyst with SunTrust Robinson Humphrey downgraded Herbalife to a neutral ranking from a buy recommendation and slashed his 12-month target price from $75 to $55.
Herbalife Chief Executive Michael O. Johnson sought to calm fears about the company’s prospects during a conference call with analysts Tuesday.
“We are at a single point of a much larger journey,” Johnson said. “It may mean a short-term slowdown in our historical growth rate.”
Herbalife, a 34-year-old company that sells weight-loss and nutrition products through independent salespeople in 91 countries, has spent the last two years defending itself against a bruising attack from hedge fund manager Bill Ackman.
Ackman has said Herbalife’s business model is a well-disguised pyramid scheme that rewards its millions of distributors more for recruiting than for selling its products.
He said his fund, Pershing Square Capital Management, shorted Herbalife by more than $1 billion, betting that the company’s stock price would fall. He trimmed the short bet as shares rose in 2013 but said he still holds a significant bet against the company.
Herbalife stock soared 139% last year in the face of Ackman’s challenge, but so far this year, shares have fallen 44%.
The criticism from Ackman and others spurred investigations from several state and federal agencies, including the Federal Trade Commission, but none of them has taken any action.
Last week, Herbalife agreed to pay $15 million to resolve a class-action lawsuit filed by a former distributor who made many of the same allegations that Ackman did. The company denied wrongdoing but said it agreed to settle the lawsuit to avoid the costs and the distraction of a lengthy legal fight.
In the conference call, Herbalife executives said the company is implementing policy changes that will protect its distributors. Among them: limiting the amount of product they can buy in their first order.
But the currency situation in Venezuela will continue to be a drag on profits. The company lowered its projected earnings for the fourth quarter to a range of $1.30 to $1.40 a share, well below analysts’ previous expectations of about $1.69 a share.
Herbalife executives believe that the changes will ultimately make the company stronger.
“We have a lot of confidence in the company,” Chief Financial Officer John DeSimone said in the call with analysts. “This is a short-term issue we’ll manage through.”
