Bleak 1Q17 outlook
Herbalife (HLF) accounts for 0.23% of the Vanguard Consumer Staples ETF (VDC). HLF stock fell more than 4.0% soon after the company announced its weak 1Q17 outlook on February 23, 2017. However, as we saw in the previous part of this series, Herbalife stock rose significantly after Carl Icahn increased his stake in the company in March 2017.
Citing challenges in China and adverse currency movements, Herbalife now expects 1Q17 sales to fall 5.0%–9.0%, reflecting a fall in volume of 1.0%–5.0%. Adjusted EPS (earnings per share) is expected to be $0.50–$0.70 compared to $1.36 in 1Q16.
The above graph shows some recent trends for Herbalife, and they aren’t very good. For instance, Herbalife’s growth has slowed down in China, which until now has been a significant contributor to its financials. In 4Q16, the region marked an 11.0% fall in volumes compared to a 30.0% rise in 4Q15. We’ll look at this in more detail in Part 4 of this series.
This trend is expected to continue in 1Q17. Herbalife’s results are likely to be impacted by the timing of the Chinese New Year, macroeconomic challenges in Brazil, and the strengthening of the US (SPY) dollar, especially against the Mexican peso.
The recent past
On February 23, 2017, Herbalife reported its results for 4Q16, which ended on December 31, 2016. Its 4Q16 adjusted EPS of $1 came in ahead of Wall Street’s estimate but fell 14.5% YoY (year-over-year). That reflected weak volumes, especially in its key market of China. It also reflected an adverse currency movement, which impacted its bottom line by $0.11. For 2016, EPS was $4.85, surpassing analysts’ estimate by $0.01, although it fell 2.0% YoY.
Sales fell in 4Q16
In 4Q16, Herbalife’s net sales came in at $1.1 billion, a 4.9% fall compared to 4Q15. It reflects a volume decline in China (-11.0%) and South and Central America (-16.0%). The reported revenue remained shy of the consensus estimate. It’s worth noting that its revenues fell after rising in the past three consecutive quarters. For 2016, revenues remained roughly flat at $4.5 billion, which was in line with analysts’ estimates.
Could 2017 mark a recovery?
For 2017, Herbalife projects its revenue will rise 0.30%–3.3%, supported by a 2.0%–5.0% rise in volume. However, given the recent fall in sales and volumes in its key markets and adverse currency movements, driving sales growth could prove to be a significant challenge.
Herbalife’s adjusted EPS is expected to be $3.65–$4.05 compared to $4.85 in 2016. Negative currency movement is expected to impact EPS by $0.50. Analysts expect Herbalife to post EPS of $5 in 2017.