Herbalife is scheduled to release its next earnings report on May 5 after closing bell. The company has been struggling with declining sales volume for some time as management tweaks its business model. In addition to volume, investors will also be looking at distributor growth and whether Herbalife can beat estimates.

Herbalife Ltd. HLF

What to expect in Herbalife’s earnings report

Notorious Herbalife bull Tim Ramey of Pivotal Research Group put out his earnings preview report today. He expects another quarter of difficult volumes but believes that the multi-level marketing company may beat his estimate for distributor growth.

Ramey is expecting to see adjusted earnings of $1.03 per share, a year over year decline of 31.4%. He calls the quarter a “fairly ugly” one. Management guided for earnings of between $1 and $1.10 per share, and the consensus estimate is $1.01 per share.

Trouble with volumes

Ramey expects to see Herbalife’s sales volume decline 6.6% overall. He’s looking for a 35% increase in China and a 10% increase in Europe, the Middle East, and Africa. He expects the Asia-Pacific region to show a 14% decline in volume and South and Central America to show a 25% decline in volume. In North America and Mexico each, he’s projecting an 8% decline.

The reason he thinks the U.S., Brazil, Mexico and Korea will all be difficult areas for Herbalife is because of the timing of the changes in the distributor compensation plan. Herbalife made three major changes to the qualification process for distributors as debate about its business model rages on. Ramey thinks the changes will be good for sales leader retention in the long term but points out that they have obviously slowed down sales growth.

Herbalife also reduced the size of its business in Venezuela where the currency has been significantly devalued, so it faces some very difficult year over year comparisons as well.

Currency headwinds

Speaking of currency devaluation, Ramey pointed out again (as many others have as well) that the strengthening of the U.S. dollar is going to weigh heavily on Herbalife’s earnings results. He estimates a 12.2% decline in sales for the March quarter but pointed out that Herbalife hedges its current currency exposure. As a result, there’s no immediate impact from the strength of the U.S. dollar, nut there will be the rest of the year.

He added that currency headwinds will probably have an impact on management’s guidance as well. He said the euro “has been especially brutal” as it has declined by about 8.5% since the average from the first three weeks of January. He also said the Mexican peso is down by about 5%.

“These moves will be mitigated to a degree by pricing, but only to a degree,” Ramey wrote in his research note.

Other factors in Herbalife’s earnings report

Anecdotally, Ramey thinks Herbalife is starting to be “building confidence in the leadership ranks.” He said one number he will be watching carefully is the number of new distributors. He expects a decline of 8.3%, but he thinks that if the multi-level marketing company is going to beat on any number, this would be the one.

The analyst also estimates that Herbalife’s share count declined 20% in the last quarter, which should help the company’s bottom line. He said last year’s share repurchases will make a significant impact by contributing between 16 cents and 20 cents per share to earnings. He also expects cost controls to assist in protecting margins from the currency issues.

FTC investigation still looking

Further, he said investors are still waiting to see what the Federal Trade Commission decides about Herbalife. In fact, he thinks 90% of the story on Herbalife right now is with the FTC investigation. He thinks the company’s fundamentals will just confirm the company’s methodology. He said the best case scenario is for Herbalife to demonstrate that it “has a good handle on the impacts of the compensation plan changes.”

However, he added that if management’s expectation of returning to growth in the fourth quarter turns out to be true, the company’s stock should move higher. He points out that so far this year, Herbalife stock is up 24% and that it is outperforming the market by 22%.

Ramey continues to rate Herbalife as a Buy with a $75 per share price target. As of this writing, shares of Herbalife were up 0.09% to $46.80 per share.