Los Angeles-headquartered Herbalife Nutrition (HLF 2.00%) is known for its health and beauty products, and for its use of direct salespeople. While the digital age and the COVID-19 pandemic have required Herbalife to hybridize its sales strategy, the company's multilevel marketing business model remains old school in spirit and practice.

Speaking of old school, at least one tried-and-true valuation metric suggests Herbalife stock is a screaming bargain. However, informed investors should consider any metric just one piece of a much larger puzzle. Indeed, in Herbalife's case, some parts of the puzzle are a bit puzzling.

The company's latest results do answer a few questions but not in the way one might expect. Herbalife's ability to connect with new generations of buyers and sellers may be lacking, to the detriment of the company and its shareholders.

Person with phone standing near a table with nutritional supplements and fruit.

Image source: Getty Images.

Playing catch-a-knife with Herbalife

The line between actual value and a value trap is remarkably thin, so investors must be cautious when considering catching the falling knife that is Herbalife stock. After hitting a 52-week high of $55.78 last year, the stock has shed more than half of its value and continues to reach fresh, painful lows.

With share-price haircuts can emerge contrarian opportunities, though. Herbalife's trailing-12-month P/E ratio is currently under six, suggesting a bargain stock price relative to the company's profits.

But this age-old metric can mask some less-than-ideal details. After all, sometimes stocks become really cheap for good reasons.

Sure, Herbalife is a profitable business, but the financials have been trending in the wrong direction. For instance, Herbalife's first-quarter net sales of $1.34 billion represented an 11% year-over-year decrease as well as a slight miss compared to the analyst consensus estimate of $1.38 billion.

Meanwhile, its first-quarter adjusted diluted EPS of $0.99 outpaced the $0.90 analyst estimate but fell short of the prior-year quarter's $1.42. 

Perhaps most disappointing of all was Herbalife's full-year 2022 revenue guidance, which called for a decrease of 4% to 10%. Three months earlier, the company had modeled flat to 6% revenue growth for the year.

Minding the generation gap

Thus, the company effectively acknowledged an unsettling trend developing on the top line that's not likely to resolve itself soon. On the earnings call, Herbalife Chairman and CEO John Agwunobi had little choice but to acknowledge the situation: "Overall, top line results fell short of our expectations."

The headwinds should be familiar to anyone who's read more than a handful of conference-call transcripts this year. In particular, Agwunobi cited inflation, geopolitical uncertainty, COVID-19, and lockdowns in China as "ongoing challenges."

Fair enough, but then, Agwunobi's blame game took an unexpected turn as the CEO noted an "emerging shift in behavior" among Herbalife's distributors. The company's press release expands on this line of thinking, "[A]s a group, the behavior of distributors that joined the business during the pandemic has departed from historical trends and is below the Company's expectations." He continued, "This slowdown is primarily isolated to the collective performance of that group."

On the earnings call, CFO Alex Amezquita further accounted for the underperformance of newer distributors, noting, "[I]t's not uncommon to see some of the newer cohorts underperform the older cohorts. [...] They've been only Zoom, only virtual, have not experienced the energy of Herbalife Nutrition." 

It's not a good look for management to point the finger at newer/younger distributors -- the lifeblood of the company's business model, really -- when they, along with the younger customers, are dealing with the same challenges (inflation, COVID-19) that Agwunobi cited for his company. If anything, the company should be focused on providing extra guidance and support to the sellers during this critical time for the company.

An unhealthy trend

Hopefully, management won't continue down this path of finger pointing in future earnings calls. Investors should insist that leadership foster younger distributors while detailing a specific, actionable road map to revenue growth.

In the meantime, the latest results and guidance point to declining sales -- and the power of selling, more than the products themselves, is what has likely kept Herbalife going for so many years. Therefore, it's best for investors to avoid the proverbial falling knife as this stock's low valuation could soon go even lower.