Herbalife Ltd. (HLF): Ramey Fires Shots Ahead Of Earnings

Herbalife Ltd. (HLF): Ramey Fires Shots Ahead Of Earnings
Herbalife Ltd.

Herbalife is scheduled to release its third quarter earnings report tomorrow, and Wall Street appears to be expecting good things. Shares rose in early trading this morning, climbing by as much as 1.84% to $57.07 per share.

Herbalife tosses another barb at Ackman

Last week Herbalife spokesperson Alan Hoffman issued a brief statement attacking activist investor Bill Ackman, who has been on a years-long question to take down the company. He said: “I hope Bill Ackman has done more research on Valeant than he did on Herbalife, Target, Borders and JC Penney.”

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Pivotal Research analyst Tim Ramey commented (anecdotally) in response to what he said was a “fairly blunt assessment” from Hoffman that he doubts the Herbalife executive “would venture such a statement without some degree of confidence” in the multi-level marketing company’s earnings results.

Of course Hoffman was reminding investors of some of Ackman’s past sour bets, with Borders especially striking a chord with some investors.

Herbalife videos released

Hoffman’s statement may or may not have been a loose response to the release of some short video clips of Herbalife executives and distributors last week, although of course it doesn’t mention the videos. The two sides have been trading barbs for years, however, with the mudslinging on both sides getting worse and worse.

Supposedly the source video for the first clip is about 45 minutes long. It’s interesting that neither the anti-Herbalife camp nor Herbalife itself seems willing to share the full video. In the clip, Herbalife CEO Michael Johnson is heard emphasizing how important recruitment is to the company

Also last week, Sen. Jeff Klein revealed a new investigation of Herbalife’s business model conducted by public advocate Letitia James. He called the company’s business practices “deceptive” and said it makes “bogus claims” about its products. Sen. Klein released a second video clip of distributors talking.

Herbalife earnings preview

When Herbalife reports its third quarter earnings tomorrow after closing bell, Wall Street expects earnings of $1.05 per share on $1.16 billion in revenue. It comes as no surprise that Ramey’s earnings estimate is higher than the consensus, coming in at $1.15 per share. Management guided for earnings of $1 to $1.10 per share. In last year’s third quarter, the multi-level-marketing company posted earnings of $1.45 per share.

It’s expected that currency headwinds will weigh on Herbalife’s results heavily. Competitor Nu Skin saw significant problems in China during the third quarter, and it can be expected that China had some impact on Herbalife as well. Just how great the impact was will be a key focus in tomorrow’s earnings report. In the previous quarter, China made up more than 20% of the company’s total sales.

It should be noted that while Nu Skin shares plunged following its earnings report and warnings about China, the stock has rallied nicely.

Is Herbalife making progress?

Ramey expects tomorrow’s report to show that Herbalife is moving in the right direction with the changes it made to its compensation plan. The analyst said in his “channel checks,” he has been hearing “distributors embracing the rule chances and seeing evidence of greater distributor retention, greater frequency of orders with lower order sizes.”

He thinks all of these trends are “healthy” and suggests that last year’s third quarter “was perhaps the period of maximum change” in Herbalife’s ecosystem.

**Updated to add clarification about the source of the second video.

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