Herbalife (NYSE:HLF), the global nutrition company that has been accused of being a pyramid scheme on more than one occasion in the last month, has just reported record-setting first-quarter earnings that left analysts' expectations in the dust. This is the 21st consecutive quarter in which the company has surpassed expectations and the stock has reacted by making a slight move higher. Let's break down the report, take a look at Herbalife's outlook on the rest of the year, and check in on one of its competitors, Weight Watchers (NYSE:WTW), to determine if we should be buying into the rally or if we should wait for a lower entry point.
Sliding past expectations once again
Herbalife released its first-quarter report after the market closed on April 28 and the results exceeded expectations on both the top and bottom lines; here's a breakdown:
|Earnings Per Share||$1.50||$1.29|
|Revenue||$1.26 billion||$1.23 billion|
Earnings per share increased 18.1% and revenue increased 12.4% year-over-year, which equated to the best first quarter in Herbalife's history; here's a breakdown of the revenue by region:
1Q 2014 Revs.
|1Q 2013 Revs.||Growth|
|Asian Pacific||$280.50 million||$311.75 million||(10%)|
|North America||$247.86 million||$221.47 million||11.9%|
|South & Central America||$244.62 million||$219.52 million||11.4%|
|E.M.E.A.||$211.14 million||$169.59 million||24.5%|
|Mexico||$142.66 million||$132.89 million||7.4%|
|China||$135.87 million||$68.44 million||98.5%|
These strong sales results were driven by worldwide volume growth of 9%, including 91% growth in China, 25% growth in Europe, the Middle East, and Africa, and 9% growth in North America. In the Asian Pacific, volume declined 6% and sales decreased 10%, but on the conference call, management said it expects this region to "return to positive volume growth over the course of 2014."
Herbalife's gross profit rose 12.7% to $1.01 billion and the gross margin showed fight, expanding 20 basis points to an incredible 80.1%. This performance allowed the company to pay dividends of $30.4 million, invest $49.7 million in capital expenditures, and repurchase approximately 9.9 million shares of its common stock for $685.8 million.
Also, in a surprising move, the board of directors announced that it will be accelerating cash returns to shareholders going forward, and to do this, it is terminating its dividend and ramping up share repurchases during the second quarter. Herbalife expects to repurchase roughly $581 million worth of common stock during the second quarter, which is comprised of $315 million it already expected to use for repurchases, $216 million that would have been used to pay dividends over the next eight quarters, and $50 million included in previous guidance.
Overall, it was a great quarter for Herbalife and it got even better when it handed over its guidance for the full year...
Will the record-setting quarters keep coming?
In the report, Herbalife announced, "In addition, we are pleased to raise our expectations for the balance of 2014. This reflects our confidence that Herbalife is well-positioned to continue to grow and play an increasingly important role in improving nutrition and reducing obesity around the world." Here's the company's new guidance for the year:
- Earnings per share in the range of $6.10-$6.30, an increase of 13.6%-17.3% from fiscal 2013
- Revenue growth of 10%-12%
- Volume growth of 8%-10%
If these estimates are accurate, they would result in a record-setting yearly performance.
Herbalife's stock reacted to all of the earnings news by rising more than 2.2% in the trading session that followed and I believe it would have been a much greater run if the company were not being actively investigated by the F.B.I. and two state attorneys.
With this being said, due to the ongoing investigations, I believe Herbalife is too risky to invest in today; however, Foolish investors should keep this stock on their radar, as it could represent a great opportunity following the conclusion of the investigations.
A competitor puts out great results of its own
Weight Watchers, the world's leading provider of weight management services, released first-quarter results of its own on April 30 and it too surpassed analysts' expectations; here's what the company accomplished:
|Earnings Per Share||$0.38||$0.09|
|Revenue||$409.40 million||$399.20 million|
Weight Watchers' earnings per share decreased 56.3% and revenue decreased 16.6% in comparison with the year-ago period. Total paid weeks by customers decreased 13.9% to 47.5 million and the total number of active subscribers at the end of the quarter was approximately 3.65 million, a 13.7% decrease year-over-year.
The quarterly results were better than Weight Watchers had anticipated, which allowed it to raise its full-year guidance for fiscal 2014; the company is now calling for earnings per share in the range of $1.45-$1.70 while it had previously expected $1.30-$1.60.
Although the results exceeded expectations, it was still a very disappointing quarter of negative growth for Weight Watchers; regardless, its stock has reacted by soaring over 25% higher in the trading session. This rally may continue for the next several days or even weeks, but I would not be a buyer of it at any level. I think the steep drop in active members and attendees at the company's meetings is a major red flag and a Foolish investor should not consider risking an investment.
The Foolish bottom line
Herbalife has just burned past analysts' expectations in its first-quarter report and its shares have responded by rising. The good news did not stop there, as the company then raised its outlook on the full year to point toward a record-setting performance. Even though this usually indicates a company that we want to invest in, Herbalife is being investigated by the F.B.I. and two state governments for the possibility of being a pyramid scheme, so Foolish investors should stay far away today. Once the investigations reach conclusions and the investigators release their results to the public, we can then use the information provided to make an educated decision on whether or not Herbalife is safe and if it should have a spot in our portfolios.
Joseph Solitro has no position in any stocks mentioned. The Motley Fool owns shares of Weight Watchers International and has the following options: long January 2016 $57 calls on Herbalife. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.