Herbalife

 

Herbalife Ltd. (NYSE:HLD) will report 4Q12 on Tuesday, February 18, after the market closes, and hold an investor call the next day at 11am EST. With all the news regarding Herbalife, some may have forgotten about earnings!

Analysts at Barclays recently raised their 4Q EPS for Herbalife to $1.05 from $1.01, which is at the high end of the pre-announced results from January 17. Total sales growth of 19.9% was also pre-announced, driven by 18.4% growth in volume points.

On the call investors hope to hear updates on: 1) any change in trends given the negative publicity from Bill Ackman, 2) additional steps the company has taken or plans to take to improve transparency, 3) updated survey work done by The Lieberman Research Group, 4), the impact of foreign exchange rates specifically related to the devaluation of the Venezuelan Bolívar and 5) how aggressive the company plans to buy back stock. Analysts also expect initial 1Q13 guidance and updated FY13 guidance.

It is no secret that there is currently a heated discussion underway between high-profile activist investors, with Bill Ackman of Pershing Square on the short side and Daniel Loeb of Third Point (who is now selling shares) and Carl Icahn on the long side, which we think is far from over. Bill Ackman has continued to seek publicity on his short thesis, including producing a list of nearly 300 questions addressed to Herbalife Ltd. (NYSE:HLD)’s management, which analysts do not expect them to answer.

Herbalife Ltd. (NYSE:HLD) preannounced 4Q12 results in mid-January, in order to lift its restriction on buying back stock, so the actual results will likely not be a primary concern on the upcoming conference call. One topic of discussion may be how aggressively Herbalife plans to use its balance sheet to buy back stock. A second area of focus could be whether the negative publicity that William Ackman has contributed to is having any impact on sales, retention of existing distributors or signing up new distributors. The company is likely taking the steps it can to regain investors’ confidence, including increasing the transparency of its business model, providing third-party survey data, and changing or eliminating policies that could be perceived negatively.

What To Focus on During the Conference Call

Sales Trends: Is the negative publicity from Bill Ackman’s campaign having any impact on sales? Which countries and geographies were the top performers? What will be the impact from the devaluation of the Venezuelan Bolívar?

Bill Ackman has made it no secret that he believes Herbalife is a pyramid scheme and he is trying to drive as much awareness of his opinion as possible. While many expect there to be some negative impact on the business, the majority of Bill Ackman’s audience has been analysts and investors, who are not Herbalife’s main distributors or customers. Additionally, only ~20% of sales are in the US.

In the preannounced results, Herbalife said that every region reported double-digit increases in Volume Point growth, which was also the trend in 2Q12 and 3Q12.

On February 8, Venezuela announced it would devalue its currency from 4.30 to 6.30 Bolívars to the US dollar. Herbalifeanticipated a potential devaluation so its initial FY13 guidance included some impact from this; however, potential one-time costs related to it were not included. Venezuela represents ~3% of Herbalife’s global sales.

Increased transparency: What additional steps can Herbalife Ltd. (NYSE:HLF) take to improve transparency or limit the potential for perceived problems related to its business model? How much in additional expenses will Herbalife incur related to defending itself from Bill Ackman?

Data collected by The Lieberman Research Group, a third-party firm, showed Herbalife Ltd. (NYSE:HLF) products were purchased by 5.7 million US households over the prior 90 days.

Additionally, the large majority of former distributors sign up to be distributors in order to get a discount on the products.

At some point, many expect Herbalife Ltd. (NYSE:HLF) to change the title of distributors who do not qualify as sales leaders. These individuals do not receive royalties or bonuses and are primarily signed up as distributors to receive a 25%-42% discount.

There will be a temporary increase in expenses in FY13 related to responding to the allegations from Bill Ackman, which may impact FY13 EPS guidance.

Sales Initiatives: What has been the reaction to limiting new distributors’ initial purchase to 1500 volume points (VPs)? Are there any other new initiatives underway?

Herbalife tested limiting new distributors’ initial purchase to 1500 VPs in three markets. The expectation is that this will increase retention because new distributors will need to have a plan to sell the products prior to qualifying for bonuses & royalties.

Uses of Cash: How aggressively does Herbalife plan to buy back stock going forward? Have they had any discussions with Carl Icahn over potential strategic alternatives to enhance shareholder value, such as a recapitalization or a going private transaction?

Herbalife announced a new share repurchase authorization of $1 billion when it reported 2Q12. The company had only exhausted ~$50 million of that authorization through 4Q12. It preannounced 4Q12 results on January 17 in order to lift the blackout period so it could begin buying back stock in January.

At this point, many expect Herbalife to continue to buy back stock in the open market but do not expect it to announce an accelerated share repurchase or tender offer unless pushed for it by an activist investor.

Preannounced Results for 4Q12

Volume point growth of 18.4%, with all six geographic regions increasing double-digits
Sales growth of 19.9%
EPS of $1.01-$1.05
Tax rate of 24.2%-25.2%
Guidance for FY13
Volume point growth of 8.5%-10.5%
Sales growth of 10%-12%
EPS of $4.40-$4.55
Tax rate of 26.5%-28.5%
Capital expenditures of $165-$185 million