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Herbalife posts record results

The L.A. company's quarterly earnings easily beat analyst estimates — again.

April 29, 2013|By Stuart Pfeifer, Los Angeles Times
  • Distributors buy Herbalife products at a distribution center in Carson.
Distributors buy Herbalife products at a distribution center in Carson. (Mark Boster / Los Angeles…)

Herbalife Ltd. has now notched 17 consecutive quarters in which its profits sailed past Wall Street projections.

The Los Angeles nutritional products company told investors Monday that earnings during the first three months of the year climbed nearly 10% to $118.8 million while sales hit a record $1.1 billion. Top executives will host a call with analysts to discuss the results Tuesday morning.

Despite the impressive numbers, executives will have plenty of questions to answer.

Herbalife has been battling a hedge fund manager's allegations for four months that it operates a pyramid scheme. A former distributor made similar allegations this month in a lawsuit, filed in federal court in Los Angeles.

And it still has not replaced its auditor, KPMG, which resigned after a senior partner at the accounting firm was accused of insider trading.

That controversy did not stop people from buying the company's line of meal-replacement shake mixes, protein bars, juices, teas and personal care products.

It earned $118.8 million, or $1.10 a share, compared with $108.2 million, or 88 cents, a year ago. The company had forecast earnings of $1.03 to $1.07 a share, and analysts expected $1.07.

"We continue to deliver record results in sales and profitability as our independent distributors successfully execute numerous growth strategies," Herbalife chief executive Michael O. Johnson said in a statement. "Obesity and poor nutrition are global public health problems. Our distributors are proud to be part of the solution."

The good numbers come after a rocky year for Herbalife.

The company's shares were hammered last May after hedge fund manager David Einhorn questioned its business model during an analyst call. Seven months later, Bill Ackman, who manages hedge fund Pershing Square Capital Management, accused Herbalife of operating a pyramid scheme and bet $1 billion that its shares would fall.

This month KPMG resigned as the company's auditor after one of the accounting firms' senior partners was accused of insider trading in Herbalife stock. KPMG withdrew its approval of three years of the company's financial reports.

As a result of KPMG's resignation, Herbalife said its first-quarter earnings report "has not been reviewed by an outside independent accounting firm as required by the rules of the Securities and Exchange Commission."

"The company's audit committee and management believe that the interim financial information presented herein fairly presents, in all material respects, the financial condition and results of operations of the company," Herbalife said in its quarterly report.

The company has not said when it expects to employ a new accounting firm. Herbalife said it would file an amendment to its first-quarter report "as soon as practicable," after a new accounting firm is employed and reviews the numbers.

Not everyone on Wall Street was swayed by the skepticism about the 33-year-old company.

Billionaire investor Carl Icahn bought 15% of Herbalife's shares, betting that Ackman was wrong and that the company would continue to thrive. Herbalife allowed Icahn to nominate two directors to the company's board; shareholders approved Icahn's nominees last week at their annual meeting in Beverly Hills.

Analysts also remain bullish on the company. Seven recommend buying the company's stock, while three suggest holding it. They have an average 12-month estimated price of $55.57 a share, more than 40% higher than its Monday close.

Brian Wang, a Barclays analyst, said in a research note that the company has benefited by allowing its distributors to sell products in small quantities through nutrition clubs, instead of its past model of selling exclusively in bulk.

"This shift has driven significant growth, and we expect this momentum to continue," Wang said.

Timothy Ramey, an analyst with D.A. Davidson & Co., called it "another blowout quarter" for Herbalife with "solid growth across all segments." He estimates the stock will more than double within the next 18 months.

Ackman's well-publicized criticism has had an economic effect on Herbalife. The company said in the quarterly report that it spent $9.5 million on "legal and advisory services" to defend itself against Ackman's attack.

The hedge fund manager said he was not moved by Herbalife's strong sales numbers.

"Earnings are irrelevant for a pyramid scheme," he said in an email.

Founded in 1980, the company sells its products in more than 80 countries.

Herbalife shares closed at $38.75 on Monday, up 48 cents, or 1.2%. The company announced its first-quarter results after the market closed.

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