Business

Street doubts Herbalife growth story after earnings miss

Investors are no longer buying Herbalife’s growth story.

After the company disappointed the Street with its first earnings miss in five years, the stock dropped almost 12 percent on Tuesday — its worst decline in three months.

No amount of talking by Herbalife Chief Executive Michael Johnson could bid the stock up.

“The opportunity for Herbalife has never been greater,” Johnson said in a Tuesday morning call with analysts to discuss the results.

The stock was down 11.8 percent, or $7.97, at $59.51 at 2:45 p.m. in New York trading. It could have been worse, however. The plunge triggered an exchange circuit breaker that halts short selling in the shares until the end of trading Wednesday.

Herbalife, which reported results after the bell on Monday, said profit fell 16.6 percent to $119.5 million during the quarter. Revenue grew 7 percent to $1.3 billion — below the company’s earlier forecast of 9 percent to 11 percent.

Investors were particularly worried about weakness in Herbalife’s biggest market: the US. One measure — volume points — fell 1 percent in the quarter, Herbalife president Des Walsh said on the call.

Despite the earnings miss, Herbalife raised its forecast for the full year. That led Barclays analyst Meredith Adler to ask on the call if others inside Herbalife disagreed with the rosy growth predictions — to which Walsh answered no.

The US drop followed heightened regulatory scrutiny of the company and continued attacks by activist investor Bill Ackman, who has called the company a pyramid scheme and placed a $1 billion short bet that its shares will collapse.

Herbalife has spent $41 million fighting Ackman, including almost $4 million to deal with a Federal Trade Commission probe.

“We are confident there will be a successful conclusion” to the FTC inquiry, Johnson said during the call.

Another trouble spot is Venezuela, a big market for Herbalife where it was forced to roll back prices earlier this year. Herbalife has also taken a sizable foreign exchange hit there.

Ackman said last week that an investigation by his Pershing Square hedge fund found that distributors in Venezuela, who can get paid in US dollars by opening up business outside the country, have been largely engaged in a money transfer scheme as they convert the earnings on the black market, where dollars are worth seven times the rate of 10.6 to one that Herbalife uses.

Herbalife CFO John DeSimone said last week that there is no longer “an economic monetary arbitrage within Venezuela,” noting the weakness of that market.

Indeed, the company reported that Venezuelan sales dropped 40 percent in the quarter. Still Herbalife hasn’t moved to embrace the 50 to one rate rivals are now using, investors note.
One problem for Herbalife is the Venezuelan writedown’s impact on its cash position, which is funding the company’s share buyback program.

Only $123 million of its $733 million in cash was in the US as of the second quarter, with $152 million of that in Venezuela. A write down could reduce its cash considerably.

Had Herbalife written down its Venezuelan business, it would have lost an additional $109.5 million, and cash would have been further reduced by about $120.2 million, the company said in a regulatory filing.