Brushing aside market noise, Herbalife posts 17% sales increase

29-Apr-2013 - Last updated on 30-Apr-2013 at 16:09 GMT

Herbalife's sports nutrition line has captured a younger demographic for the company.

Herbalife has suffered the slings and arrows of outraged investors recently. But you wouldn’t know it from the company’s financial statements; yesterday the company reported a 17% rise in first quarter net sales, hitting $1.1 billion.

Herbalife’s weight management and sports nutrition products and the company’s relatively new nutrition club sales model are the primary drivers of this success, said CEO Michael O. Johnson.

“The global obesity epidemic continues. This obesity macro trend is addressed directly and effectively by our products and distributors. The nutrition club sales model improves access to our products by consumers who need them the most,” Johnson said during a conference call with analysts.

Johnson said the company’s sports nutrition lines had driven sales and brought a new, younger demographic to the company both in terms of customers and distributors.

Criticisms of sales methods

Herbalife, the world’s biggest direct-selling company focused solely on nutrition, has been the subject of a struggle between activist investors Bill Ackman, who has challenged the company’s business model, and Carl Icahn, who lauds the company’s continued strong financial performance.

The nutrition club model (in which distributors rent out store fronts to sell products and recruit sales associates) and the way Herbalife quantifies its distributors’ compensation and the sales they make were among Ackman’s criticisms of the company, criticisms that have been taken up by a number of analysts and market observers.

Des Walsh, Herbalife’s president, said the negative press the company had received as a result of the investors’ tussle has not affected the company’s operations.

“We believe that the noise out there is not having any material effect on our business,” he said.

Nevertheless, while the company is not budging on the nutrition clubs concept (it has 54,000 of them now, with that number growing), it is responding to these criticisms in other ways. It is developing a new nomenclature to address questions about distributor compensation, according to Walsh. And Herbalife will prohibit the purchase of leads by its distributors as of June.

“This method has been misunderstood outside of Herbalife. This is primarily a factor in the North American market. Our successful distributors base their businesses on the daily consumption of our products,” he said.

Asia now biggest region

Significant among the results was that Asia Pacific is now the biggest region for the company, both in terms of overall sales and in active distributor numbers. Volume in the region grew 17% year over year during the first quarter, versus 4% for North America, the company’s second biggest region. South & Central America is another strong growth region for Herbalife, showing a 33% rise in volume points. Volume overall grew by 13% year over year during the quarter, the company said.

Adjusted net income for the quarter of $137.4 million, or $1.27 per diluted share, compares to 2012 first quarter net income of $108.2 million and EPS of $0.88, respectively. On a reported basis, first quarter 2013 EPS of $1.10 increased 25 percent compared to the $0.88 reported in the comparable quarter last year. IN addition, the company raised its fiscal year 2013 EPS guidance to a range of $4.60 to $4.80. The board of directors also approved a $0.30 per share quarterly dividend.