Herbalife posts better-than-expected earnings, again
Los Angeles nutritional products company Herbalife Ltd. reported $1.1 billion in first-quarter sales and profit that soundly beat analysts’ expectations and its own guidance.
The company reported earnings of $118.8 million, or $1.10 a share, up from $108.2 million, or 88 cents, in the same period last year. The company had forecast earnings of $1.03 to $1.07 a share.
Herbalife said revenue was $1.1 billion, a 17% increase from the same period last year.
The company has beat analysts’ earnings estimates for 17 consecutive quarters.
Inside Herbalife: Los Angeles Times photography
The good numbers come after a rocky year for Herbalife. The company’s shares were hammered last May after hedge fund manager David Einhorn questioned its business model during an analyst call. Seven months later, Bill Ackman, who manages Pershing Square Capital Management’s hedge fund, accused Herbalife of operating a pyramid scheme and bet $1 billion that its shares would fall.
This month KPMG resigned as the company’s auditor after one of the accounting firms’ senior partners was accused of insider trading in Herbalife stock. KPMG withdrew its approval of three years of the company’s financial reports. Although that’s not Herbalife’s fault, the now-unaudited financials caused new concerns about the company.
Not everyone on Wall Street was swayed by the skepticism about the 33-year-old company. Billionaire investor Carl Icahn bought 15% of Herbalife’s shares, betting that Ackman was wrong and that the company would continue to thrive. Herbalife allowed Icahn to nominate two directors to the company’s board; shareholders approved Icahn’s nominees last week at their annual meeting in Beverly Hills.
Analysts also remain bullish on the company. Seven recommend buying the company’s stock, while three suggest holding it. They have an average 12-month estimated price of $55.57 a share, more than 40% higher than its Monday close.
Brian Wang, a Barclays analyst, said in a research note that the company has benefited by allowing its distributors to sell products in small quantities through nutrition clubs, instead of its past model of selling exclusively in bulk.
“This shift has driven significant growth, and we expect this momentum to continue,” Wang said.
The controversy centers on the way Herbalife compensates the independent distributors who sell its line of meal-replacement shake mixes, nutrition bars, juices, teas and vitamins. These distributors get commissions from their own sales, as well as the sales of those they recruit into the business.
Ackman noted that about 90% of the company’s distributors lose money or break even, while a scant few make huge profits. The company said that most people who sign up as distributors do it to obtain a discount and personally consume the products.
Ackman said he was not moved by Herbalife’s strong sales numbers.
“Earnings are irrelevant for a pyramid scheme,” he said in an email.
The company does not sell its products in retail outlets. Instead, it relies on the distributors, who recruit customers, counsel them about nutrition and fitness and sell products to them. Many distributors advertise with the slogan “Lose weight now. Ask me how.”
Founded in 1980, the company sells its products in more than 80 countries.
Herbalife shares closed at $38.75 on Monday, up 48 cents, or 1.2%.
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