Ackman has had ‘Minimal Impact’ on Herbalife Revenue: Barclays

Ackman has had ‘Minimal Impact’ on Herbalife Revenue: Barclays
By Herbalife International of America, Inc. ( [CC BY-SA 4.0], via Wikimedia Commons

Herbalife Ltd. (NYSE:HLF) will report 1Q13 on Monday, April 29, after the market closes, and hold an investor call the next day at 11am EST. Analysts at Barclays are maintaining their 1Q EPS of $1.07, which is in line with consensus and at the high end of the $1.03-$1.07 guidance. They estimate total sales growth for Herbalife Ltd. (NYSE:HLF) of 15.8%, driven by 13.6% growth in volume points and a drag of 0.6% from forex.

Ackman has had 'Minimal Impact' on Herbalife Revenue: Barclays

On the call they hope to hear updates on: 1) any progress in hiring a new auditor, 2) any change in trends given the negative publicity from Bill Ackman, 3) additional steps the company has taken or plans to take to improve transparency, 4) updated survey work done by The Lieberman Research Group, 5), the impact of foreign exchange rates and 6) how aggressively the company plans to buy back stock. They also expect Herbalife Ltd. (NYSE:HLF) to give out initial 2Q13 guidance and updated FY13 guidance.

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Sales Trends: Which countries and geographies were the top performers? Is the negative publicity from Mr. Ackman’s campaign having any impact on sales?  Mr. Ackman has continued his campaign to try to convince others, including government regulators, that Herbalife is a pyramid scheme; he has been trying to drive as much awareness of this view as possible. The negative publicity had minimal impact on Herbalife Ltd. (NYSE:HLF)’s 4Q12 results, which showed double-digit increases across all geographic regions.

New auditor: What is the time frame in which HLF expects to have a new auditor in place? How long do they believe it will take until prior financials will be audited? Will KPMG pay for the re-audited statements?

On April 9, KPMG announced its resignation as Herbalife Ltd. (NYSE:HLF)’s independent auditor because of alleged insider trading in HLF’s stock by a KPMG partner. Because this issue impaired KPMG’s independence, it was required to withdraw audit reports on HLF for the past three years.

Barclays expects HLF to find a new auditor shortly, but expect the new firm to take several quarters to re-audit results. Despite this delay, and see little risk that HLF will be de-listed from the NYSE or will see limits to its bank credit availability

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?

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, data showed that the large majority of former distributors [had signed up] to be distributors in order to get discounts on the products.

In the near future, HLF is expected to change the designation of distributors who do not qualify as sales leaders, i.e. people who do not receive royalties or bonuses and are primarily signed up as distributors to receive a 25%-42% discount.

Sales Initiatives: What has been the reaction to limiting new distributors’ initial purchase to 1500 volume points (VPs) or discounting initial business packets (IBPs) in South & Central America? Has the company’s city-by-city initiative been effective?

HLF 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 Ltd. (NYSE:HLF) 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?

As of February 19, Herbalife Ltd. (NYSE:HLF) had $788 million remaining on its current  share repurchase authorization. The guidance for FY13 assumes $50 million of buybacks in each quarter from 2Q-4Q, although HLF has aid it will buy back more shares opportunistically.

On February 28, Herbalife Ltd. (NYSE:HLF) announced the expansion of its Board by two members, to 11, with new ones nominated by Carl Icahn. The annual shareholder meeting is being held on 4/25/13. In his latest filing, Mr. Icahn owned 15.9% of HLF’s shares. In exchange for the Board seats, he agreed to limit his ownership to 25% of the outstanding shares and to not sell any stock below $73 prior to 2/28/14.

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