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Herbalife Ltd. (HLF) Earnings Results Mixed, Guidance Weak

Herbalife released its latest earnings report last night, beating on fourth quarter earnings but providing guidance that was weaker than expected. Impacts from the strengthening of the U.S. dollar versus foreign currencies pummeled the nutritional supplements company, dragging sales down by a worse percentage than expected.

Herbalife Ltd. HLF

Herbalife’s adjusted earnings “surprisingly strong”

In a report dated Feb. 27, Pivotal Research Group analyst and ultra-Herbalife bull Tim Ramey called the company’s adjusted earnings “surprisingly strong.” They came in at $1.41 per share, compared to the previous year’s $1.28 per share. Sales fell 10.7% in the fourth quarter, which was worse than Ramey’s estimate of an 8.6% decline.

The analyst noted that headwinds from foreign exchange rates were responsible for all of the decline, as currency-neutral sales were flat compared to the previous year. Herbalife saw a 6% sales volume decline by region but performed exceptionally well in China, where volume increased 19.4%. In Europe, the Middle East and Africa, volume increased 1.3%, while North America volume slipped 2.7%, the Asia Pacific region fell 12.2% and Mexico declined 7%. In South and Central America, Herbalife saw its volume plunge by 40.4%.

Other positive elements in Herbalife’s earnings report

He also pointed out that the number of sales leaders increased 9% excluding Venezuela, calling that a “huge victory.” He also noted that retention of sales leaders was a record 54.2%, compared to the previous year’s 51.8%.

Herbalife also saw a positive surprise in gross margin, which was 80.6% compared to Ramey’s expected 79.4% and last year’s 80.2%.

Currencies beat down Herbalife

Herbalife guided for a weak year based on a bigger-than-expected impact from foreign currencies. Management expects a negative impact of $1.19 per share from currency exchange. They also expect weaker volume, guiding for a 6% to 9% decline in sales, compared to Ramey’s estimate of a 3.4% decline. Herbalife expects volume to decline by between 1.5% an 4.5% this year and currency to remain a headwind of 8%.

For the full year, management expects earnings per share to be between $4.10 and $4.50 per share. Ramey pointed out that Herbalife did beat its fourth quarter guidance and said he thinks the multi-level marketing company could beat this full year guidance as well.

Ramey cuts Herbalife estimates

Based on the guidance, the Pivotal analyst cut his estimate for this year from $5 to $4.40 per share. For next year, his estimate moves from $6.75 to $5.20 per share. This is the second time this month that he reduced his estimates for Herbalife. Ramey called the guidance cut “jarring” but added that there was “a lot to like” about Herbalife’s fourth quarter.

He also noted that CEO Michael Johnson said they’re transitioning into having more of a focus on consumers instead of sales and looking to make sales more transparent and sales easier for distributors to enter.

Ramey thinks Herbalife is “very cheap,” point out that the company’s shares trade at about 7.9 times 2015 earnings per share estimates. He also called the company “powerfully attractive,” as it enjoys a 12% free cash flow yield.

The analyst maintained his Buy rating and $75 per share price target on the company.

What about the investigation?

One thing that Herbalife management failed to address during the earnings call this week was the allegation that the company has an undisclosed SEC investigation. Probes Reporter has been following it and all but confirmed that there is some kind of probe of Herbalife going on at the SEC that may or may not be related to the FTC investigation that has been disclosed.

Ramey also has yet to weigh in on this issue, which will continue to be an overhang on the company’s stock until the investigation is resolved.

Shares of Herbalife slumped by as much as 5.17% today, falling as low as $33.02 per share.