Date: 4th May, 2017
Time: 4:00 PM
Anyone interested in Herbalife (NYSE:HLF) should have the above date and time in their calendars. This is the day the company releases its Q1’17 earnings. One and half hour later, it will hold its conference call, which is a must-listen. This date is so important and will probably determine the fate of the company for the remaining part of the year.
Let me explain. In November, John Oliver aired a segment on Herbalife. The segment became very popular. I estimate the video was viewed by almost 25 million people on YouTube, Facebook, Twitter, and on TV. John Oliver is one of the most influential people in the United States, according to Time magazine. The episode was a sign of relief for Herbalife shorts, who believed it would take the company down. In his December letter to investors, Bill Ackman wrote about the episode and the impact it could bring. As I will show later, the show had minor impacts on the stock price.
After this, short-sellers placed their hopes on the new documentary, Betting on Zero. In the letter mentioned above, Bill said the following:
We believe that the John Oliver segment and the wide distribution of the film are materially positive developments which will help elevate the Herbalife story beyond traditional financial news media.
In a recent report, Quoth The Raven, a prominent Herbalife bear, said this about the film:
The potential impact of a coming nation-wide documentary has been significantly underestimated and may cause an unprecedented public relations nightmare for the company that it may permanently have trouble recovering from.
It has been asserted over the last few years by me that much of Herbalife’s organic internal growth comes from the confidence of its distributors and the confidence that those distributors have in their ability to earn from potential new recruits. This film will be the first effective instance of taking what is otherwise a Wall Street story and boiling it down to a gut wrenching and stomach churning experience that any average movie watcher can experience. It could wreck the confidence of millions of potential recruits, as well as potential existing distributors.
The chart below shows that John Oliver’s segment and the documentary had minimal impacts on the company’s share price. Also, although the film has had positive reviews from New York Times, the Washington Post, and Rotten Tomatoes, the backlash the bears expected was not there. Apart from normal movie reviews, there have been no mentions on the documentary in the main media platforms. Also, Herbalife has not released a statement or counter ads after the release of the documentary. This is an indicator that the anticipated backlash did not happen. We recently saw the backlash that happened after United Airlines (NYSE:UAL) ejected a customer from its plane.
For now, the financial impacts of the John Oliver segment and the documentary are not known. That’s the reason why the upcoming earnings release will be very important for the future of the company. They will tell us whether the two “events” had any impacts on revenues and the number of distributors and preferred members.
In my last article on Herbalife, I said that in the “new” company, investors needed to pay closer attention to the latter. The preferred members are people who sign up as members to receive their products at a discount.
In the U.S., we have business builders and consumers of our products. Since October, approximately 300,000 people have converted to or signed up as preferred members, people who love our products and want to enjoy them at a discount. This figure should leave no doubt in anyone’s mind that there’s genuine customer demand for our Herbalife Nutrition products.
Given that most people who watched John Oliver’s segment and the documentary are from the United States, a decline in the number will be a red flag.
In the upcoming release, Herbalife expects net sales to be down 9% and 5%. It expects to have a reported adjusted EPS of between $0.50 and $0.70 and adjusted diluted EPS of between $0.75 and $0.95. Investors expect the company to report revenues of $1.04 billion, which is down from $1.12 billion in Q1’16, and EBITDA of $154.35 million, down from $193 million in Q1’16. The decline in these performance metrics is associated with the company’s change in strategy after the federal investigation.
Apart from the financial metrics and the number of members, investors will also pay close attention to China. China has been a major growth market for the company, which, in the recent past, has been declining. Investors will look at the quarterly growth of Herbalife revenue in China and the status of the deal to merge with Tasly. Since nothing has come out so far about the ongoing investigation, I assume company management will not provide any insights on this.
The recent documentary and segment by John Oliver have not had any significant impact on HLF share price. What we don’t know is their impact on the company’s financials and member count. Most bears believe the two events might have had a significant impact on these numbers. The upcoming earnings release and guidance will give us an indication on the state of the company.
Disclosure: I am/we are long HLF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.