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Herbalife Ltd. (HLF) Post-Earnings: Legal Costs And New Initiatives

Herbalife Ltd. (HLF) held its earnings call on Tuesday, and analysts came away with some interesting observations. Notorious Herbalife bull Timothy S. Ramey of D.A. Davidson & Co. and fellow bulls Rommel Dionisio and Kurt Frederick of Wedbush provided their takes on Herbalife's latest results and the earnings call.


Herbalife deals with legal costs, re-auditing

One of the things Herbalife Ltd. (HLF) management spoke about on the call was the $20 million in legal costs it has paid so far this year. Most of those costs have been in connection with the public attacks by activist Bill Ackman. Management suggested they might actually be able to recover those legal costs, although they didn't provide any details. Ramey said he sees "several fruitful avenues" but notes that Herbalife's outside counsel David Boies probably has his own ideas.

In terms of the re-auditing process, Herbalife Chief Financial Officer John DeSimone said he expects it to be finished by the end of the current calendar year. He said when it's finished, they will then evaluate opportunities for a share repurchase. Ramey has been saying for months that the re-auditing process is almost complete and that Herbalife Ltd. (HLF) was planning a share buyback. This may be the first time Herbalife management has provided real comments on the subject apart from Ramey's speculation, which many have taken as fact.

Herbalife makes key changes to business model

Ramey also pointed to some changes Herbalife is making in its business model. All new trainees will be required to officially acknowledge the risks associated with becoming a distributor for Herbalife and understand the "average gross compensation disclosure." In addition, recertification and another training session will be required annually to review the standard dos and don'ts of the company's direct selling model. Formal training will also be required in order to open a nutrition club. Herbalife Ltd (HLF) plans to roll out all of these new initiatives worldwide by the end of next year. According to Ramey, these initiatives will put to rest questions and complaints about the company's business model

The company is also offering a 100% money back guarantee, including shipping costs. The guarantee covers all products bought in the last 12 months. Members are also allowed to refund the cost of the Initial Business Pack within 90 days of purchase and are not required to return the product.

Herbalife posts record operating results

The September quarter was the 16th consecutive one in which Herbalife Ltd. (HLF) posted revenue growth, and Ramey believes the opportunities are only going to get better because the obesity problem is increasing. According to the American Heart Association, obesity will make up 16 to 18% of annual medical costs around the globe.

Ramey believes that the most important metric from Herbalife's third quarter results was the 77% sales growth on 25% growth in Chinese sales leaders. He calls this leverage "powerful" and says it's "big enough to drive the entire company mode." The analyst believes China will pass Mexico to become the second largest country in sales by the end of the December quarter. He reiterated his Buy rating and $92 per share price target on Herbalife Ltd (HLF).

Will Herbalife exceed Q4 guidance?

Dionisio and Frederick of Wedbush note that Herbalife exceeded consensus for the September quarter and raised its guidance. They believe the company will beat its own guidance for the December quarter and have raised their estimates over guidance because they see "strong fundamental momentum." They increased their earnings per share estimate from $5 to $5.25 per share for this year and from $5.65 to $5.75 per share for 2014.

They maintained their Outperform rating on Herbalife Ltd. (NLF) and raised their price target from $76 to $81 per share.

-By Michelle Jones

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