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Why Herbalife Nutrition Stock Blasted Off Today

By Jon Quast - May 8, 2020 at 11:59AM

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While the company increased sales, it's also close to settling an ongoing investigation.

What happened

Shares of Herbalife Nutrition (HLF 4.22%) jumped higher on Friday after the company reported financial results for the first quarter of 2020. As of 11:30 a.m. EDT, the stock was up 13% for the day.

While Q1 showed net sales growth, investors may be more excited that Herbalife is close to putting an investigation from the SEC and Department of Justice in the rearview mirror.

A man drawing an upward arrow on a transparent chart with his finger.

Image source: Getty Images.

So what

Herbalife likes to highlight "volume points," a measure of when products are paid for. By contrast, net sales are a measure of when the product is delivered to the customer. Both metrics showed growth in Q1. Quarterly volume points were up 5.6% year over year to $1.6 billion, while net sales grew 7.7% to $1.3 billion. 

Additionally, Herbalife's products appear to still be attracting consumer discretionary spending despite the COVID-19 pandemic. The company gave preliminary volume-point results for April showing 20% growth and 14% growth, respectively, in China and the U.S. -- two of the countries hit hardest by the coronavirus. However, these strong results are offset by declines in countries like India and Brazil.

Net income was a different story. Herbalife earned $46 million in Q1, which was down 53% from last year. However, the company accrued an $83 million expense related to an ongoing investigation from the SEC and the Department of Justice. If not for that charge, net income would have grown 34% from the $96 million it earned in the first quarter of 2019.

Regarding the investigation, there was encouraging news. Herbalife is being investigated regarding possible violations of the Foreign Corrupt Practices Act in China. However, the company said it's close to an agreement that would defer prosecution for three years while it continues reporting on its Chinese operations. If it remains compliant with regulations during the three-year span, it's possible that total accrued fines of $123 million could be dismissed entirely. It's an ongoing process, but this development gave investors cheer.

HLF Chart

HLF data by YCharts

Now what

Considering Herbalife's revenue and net income has been mostly stagnant for some time, it's not surprising to see investors send the stock higher today. For now, investors should keep their eyes on China. Ongoing compliance with investigators could lead to further stock gains down the road. 

 

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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