Will Herbalife Exceed Earnings Expectations for the 22nd Consecutive Quarter?

Herbalife has scheduled its earnings results for release shortly, so let's find out if its streak of earnings beats will continue.

Joseph Solitro
Joseph Solitro
Jul 25, 2014 at 10:00AM
Consumer Goods

Herbalife (NYSE:HLF), the global nutrition company, has watched its stock widely underperform the overall market in 2014. However, this has not been the result of a weak financial performance; in fact, the company has exceeded expectations in both of its earnings releases year-to-date with record-setting results, and this increased its very impressive streak to 21 consecutive quarterly beats. The primary reason for its underperformance has been that accusers called it a pyramid scheme and this has led to ongoing investigations by the FBI and the attorney generals of New York and Illinois. However, Herbalife remains confident that it is operating 100% legally.

With all of the uncertainty still in the air, Herbalife has announced that it will release its second-quarter earnings on July 28. Let's take a look at the most recent report and the expectations for the upcoming release to determine whether it is gearing up to beat the estimates for a third time this year and if it represents a long-term investment opportunity today.

Source: Herbalife

Crushing the estimates once again
On April 28, Herbalife released first-quarter earnings and the results surpassed analysts' expectations with ease; here's a summary:

Earnings Per Share $1.50 $1.29
Revenue $1.26 billion $1.23 billion

Source: Estimize

Earnings per share increased 18.1% and revenue increased 12.4% year over year, which equated to the best first quarter in the company's history; these results were driven by a worldwide volume increase of 9%, which included incredible 91% growth in China.

Source: Herbalife

Herbalife's gross profit increased 12.7% to $1.01 billion and the gross margin showed strength, expanding 20 basis points to 80.1%; these increases occurred because cost of sales rose just 11.1% compared to 12.4% growth in revenue.

Also, in a very surprising move, Herbalife's Board of Directors announced that it will be accelerating cash returns to shareholders going forward, and in order to do this, it is terminating its dividend and utilizing its cash to repurchase shares of its common stock in the second quarter. With this information in mind, in the first quarter, the company paid $30.4 million in dividends and repurchased about 9.9 million shares for approximately $685.8 million, which shows true dedication to maximizing shareholder value.

Overall, it was an outstanding quarter for Herbalife and its stock responded by jumping 2.21% higher in the next trading session; investors are hoping for similar results when it releases its second-quarter report.

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Expectations & what you should watch for
After the market closes on July 28, Herbalife will release its second-quarter results and the current estimates call for more double-digit growth; here's an overview:

MetricExpectedYear Ago
Earnings Per Share $1.57 $1.41
Revenue $1.36 billion $1.22 billion

Source: Estimize

These expectations call for earnings per share to increase 11.3% and revenue to increase 11.5% year over year, which would result in another record-setting quarterly performance. Here are three other very important statistics investors will want to watch for:

  1. Third-Quarter Outlook: It will be of the utmost importance for Herbalife to provide an outlook on the third quarter that meets or exceeds analysts' expectations; currently, the consensus estimates call for earnings per share of $1.63 and revenue of $1.34 billion, which represent year-over-year growth of 15.6% and 10.7%, respectively. 
  2. Full-Year Outlook: While providing adequate guidance for the third quarter, it will also be important for Herbalife to reaffirm the full-year outlook given in its first-quarter report; this outlook projects earnings per share in the range of $6.10-$6.30, revenue growth of 10%-12%, and volume growth of 8%-10%.
  3. Share Repurchases: As we discussed before, Herbalife terminated its dividend in April and it will fully utilize its cash to repurchase shares in the second quarter. The company expects to repurchase approximately $581 million worth of its common stock in total with $315 million it had expected to use for repurchases, $216 million it would have used for dividend payments over the next eight quarters, and $50 million included under previous authorizations. Investors will want to be sure that it reaches its $581 million goal and also look for any repurchase plans going forward.
If Herbalife can deliver on earnings and revenue expectations while also satisfying the three elements above, and I strongly believe it will, the stock will likely see another jump higher; with this being said, investors should be very careful about placing new investments in the company because of the ongoing investigations and the potentially large losses that could come if they reveal any wrongdoing. 

Source: Herbalife

The Foolish bottom line
Herbalife may be a force to be reckoned with in the nutrition industry, but it is under pressure from several US regulators and this makes it a very risky investment. It will release second-quarter earnings on July 28 and although the current expectations seem attainable, I think even record-setting results will cause little movement in the company's stock; after all, strong earnings matter very little if Herbalife is found to be operating as an illegal pyramid scheme. With all of this in mind, Foolish investors should hold off on new investments in the company today, wait for the pending investigations to reach conclusions, and then use the information provided to make an educated decision on whether or not to invest.