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Herbalife's (NYSE:HLF) Q4: Beats On Revenue


Full Report / February 14, 2024

Health and wellness products company Herbalife (NYSE:HLF) reported Q4 FY2023 results topping analysts' expectations, with revenue up 2.9% year on year to $1.22 billion. It made a non-GAAP profit of $0.28 per share, down from its profit of $0.53 per share in the same quarter last year.

Herbalife (HLF) Q4 FY2023 Highlights:

  • Revenue: $1.22 billion vs analyst estimates of $1.19 billion (2.2% beat)
  • EPS (non-GAAP): $0.28 vs analyst expectations of $0.39 (29.1% miss)
  • Free Cash Flow of $60.8 million, up 25.4% from the previous quarter
  • Gross Margin (GAAP): 76.3%, up from 44.6% in the same quarter last year
  • Organic Revenue was up 2.5% year on year
  • Sales Volumes were down 2% year on year
  • Market Capitalization: $1.17 billion

With the first products sold out of the trunk of the founder’s car, Herbalife (NYSE:HLF) today offers a portfolio of shakes, supplements, personal care products, and weight management programs to help customers reach their nutritional and fitness goals.

Specifically, the company was founded in 1980 by Mark Hughes, and the first Herbalife product was a protein shake mix called the "Formula 1 Nutritional Shake Mix”. It was designed to serve as a meal replacement for individuals looking to manage their weight.

Today, Herbalife still offers meal replacement shakes but also sells multivitamins, protein supplements, aloe drinks for gut health, and collagen drink mixes for skin and hair health, among others. The company continues to expand its product portfolio organically with health, wellness, and fitness as the unifying theme.

The company’s go-to-market is unique in that it is a multi-level marketing model. In essence, the products are sold through its network of customers who sign up to sell the product. They often operate from their homes, through dedicated Herbalife nutrition clubs, or via online channels.

This multi-level marketing approach has resulted in controversy, with some claiming the business is nothing more than a pyramid scheme. Pyramid schemes are illegal businesses where returns for older customers or investors are paid using the capital of newer customers and investors, rather than from profit earned. The structure relies heavily on recruitment to sustain itself, rather than actual demand for products.

Personal Care

Personal care products include lotions, fragrances, shampoos, cosmetics, and nutritional supplements, among others. While these products may seem more discretionary than food, consumers tend to maintain or even boost their spending on the category during tough times. This phenomenon is known as "the lipstick effect" by economists, which states that consumers still want some semblance of affordable luxuries like beauty and wellness when the economy is sputtering. As with other consumer staples categories, personal care brands must exude quality and be priced optimally given the crowded competitive landscape. Consumer tastes are constantly changing, and personal care companies are currently responding to the public’s increased desire for ethically produced goods by featuring natural ingredients in their products.

Competitors offering health and wellness supplements and products include Usana Health Sciences (NYSE:USNA), Bellring Brands (NYSE:BRBR), and The Simply Good Foods Company (NASDAQ:SMPL).

Sales Growth

Herbalife is larger than most consumer staples companies and benefits from economies of scale, giving it an edge over its smaller competitors.

As you can see below, the company's revenue has declined over the last three years, dropping 3% annually as consumers bought less of its products.

Herbalife Total Revenue

This quarter, Herbalife reported decent year-on-year revenue growth of 2.9%, and its $1.22 billion in revenue topped Wall Street's estimates by 2.2%. Looking ahead, Wall Street expects sales to grow 1.5% over the next 12 months, a deceleration from this quarter.

Volume Growth

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.

To analyze whether Herbalife generated its growth (or lack thereof) from changes in price or volume, we can compare its volume growth to its organic revenue growth, which excludes non-fundamental impacts on company financials like mergers and currency fluctuations.

Over the last two years, Herbalife's average quarterly volumes have shrunk by 8.5%. This isn't ideal for a consumer staples company, where demand is typically stable. In the context of its 3.8% average organic sales declines, we can see that most of the company's losses have come from fewer customers purchasing its products. Herbalife Year-On-Year Volume Growth

In Herbalife's Q4 2023, sales volumes dropped 2% year on year. This result was a step in the right direction compared to its 10.1% year-on-year decline 12 months ago.

Gross Margin & Pricing Power

This quarter, Herbalife's gross profit margin was 76.3%, up 31.8 percentage points year on year. That means for every $1 in revenue, $0.24 went towards paying for raw materials, production of goods, and distribution expenses. Herbalife Gross Margin (GAAP)

Herbalife has great unit economics for a consumer staples company, giving it ample room to invest in areas such as marketing and talent to grow its brand. As you can see above, it's averaged an impressive 48.4% gross margin over the last eight quarters. Its margin has also been trending up over the last 12 months, averaging 15.5% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment where the company has better pricing power and more favorable input costs (such as raw materials).

Operating Margin

Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.

In Q4, Herbalife generated an operating profit margin of 4.6%, down 2.9 percentage points year on year. Conversely, the company's gross margin actually increased, so we can assume the reduction was driven by operational inefficiencies and a step up in discretionary spending in areas like corporate overhead and advertising.

Herbalife Operating Margin (GAAP)

Zooming out, Herbalife has done a decent job managing its expenses over the last eight quarters. The company has produced an average operating margin of 8.7%, higher than the broader consumer staples sector. However, Herbalife's margin has declined by 3.4 percentage points on average over the last year. Although this isn't the end of the world, investors are likely hoping for better results in the future.

EPS

These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.

In Q4, Herbalife reported EPS at $0.28, down from $0.53 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-term EPS growth rather than short-term movements.

Herbalife EPS (Adjusted)

Between FY2020 and FY2023, Herbalife's EPS dropped 40.4%, translating into 15.8% annualized declines. We tend to steer our readers away from companies with falling EPS, especially in the consumer staples sector, where shrinking earnings could imply changing secular trends or consumer preferences. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).

On the bright side, Wall Street expects the company's earnings to grow over the next 12 months, with analysts projecting an average 31.3% year-on-year increase in EPS.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

Herbalife's free cash flow came in at $60.8 million in Q4, up 463% year on year. This result represents a 5% margin.

Herbalife Free Cash Flow Margin

Over the last eight quarters, Herbalife has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 4%, subpar for a consumer staples business. Herbalife's margin has also been flat during that time, showing the company needs to take action and improve its cash profitability.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).

Although Herbalife hasn't been the highest-quality company lately because of its poor top-line performance, it historically did a wonderful job investing in profitable business initiatives. Its five-year average ROIC was 64.4%, splendid for a consumer staples business.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Herbalife's ROIC over the last two years averaged a 33.8 percentage point decrease each year. We like what management has done historically but are concerned its ROIC is declining, perhaps a symptom of waning business opportunities to invest profitably.

Key Takeaways from Herbalife's Q4 Results

We were impressed by how significantly Herbalife blew past analysts' organic revenue growth expectations this quarter, driven by outperformance in its Asia and North America segments. On the other hand, its operating margin and EPS missed Wall Street's estimates. Overall, this was a mediocre quarter for Herbalife. The stock is flat after reporting and currently trades at $11.69 per share.

Is Now The Time?

Herbalife may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

Herbalife isn't a bad business, but it probably wouldn't be one of our picks. Its revenue has declined over the last three years, but at least growth is expected to increase in the short term. And while its stellar ROIC suggests it has been a well-run company historically, the downside is its declining EPS over the last three years makes it hard to trust. On top of that, its shrinking sales volumes suggest it'll need to change its strategy to succeed.

Herbalife's price-to-earnings ratio based on the next 12 months is 4.0x. In the end, beauty is in the eye of the beholder. While Herbalife wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price right now.

Wall Street analysts covering the company had a one-year price target of $17.30 per share right before these results (compared to the current share price of $11.69).

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