Herbalife Ltd., locked in a 16-month fight with hedge-fund manager Bill Ackman, just got some fresh ammunition.
The seller of vitamins and weight-loss shakes posted higher-than-projected earnings and increased its forecast yesterday, offering evidence that the business remains healthy. The company also will free up more cash for stock buybacks by suspending its dividend -- a move applauded by its largest shareholder, billionaire Carl Icahn. Still, net income fell 37 percent last quarter, hurt by a devaluation of the Venezuelan bolivar and lower sales in Malaysia.
Herbalife is trying to weather scrutiny by U.S. regulators and law enforcement, which are investigating claims that the business is a pyramid scheme. The probes were spurred by a barrage of criticism from Ackman, who has waged a battle to shut the company down since December 2012. He bet $1 billion against Herbalife, saying it misleads distributors, misrepresents sales figures and sells a commodity product at inflated prices.
The results show “the strength of Herbalife’s business model,” Bill Stiritz, Herbalife’s fourth-largest shareholder, said in an interview. “That’s what’s defeating Ackman.”
The dividend suspension may buy Herbalife Chief Executive Officer Michael Johnson more time as he waits for the multiple investigations to play out. The U.S. Federal Trade Commission and the Federal Bureau of Investigation have opened probes into the company’s practices, contributing to a 25 percent decline in Herbalife’s share price this year through yesterday.
Herbalife hasn’t been contacted formally or informally by the FBI about an investigation, Johnson said today in a telephone interview. The company is cooperating with previously disclosed investigative requests from the FTC, Chief Financial Officer John Desimone reiterated in the same interview.
“No requests for information from the FBI,” Johnson said. “We’ve got no communication going with them whatsoever.”
Following yesterday’s report, the stock rose 2.2 percent to $60.15 at the close in New York.
Icahn called the dividend decision a “great move” on his Twitter account, saying it “confirms confidence in the future.” In addition to being Herbalife’s largest shareholder, Icahn’s firm has five executives on the board after shareholders elected three more today. Ackman declined to comment.
Herbalife will use cash from the discontinued dividend to buy back $216 million more of its shares than previously planned. Repurchases could reach as high as $581 million in the current quarter, helping reward investors. The company plans to use the cash it would have paid during the next eight quarters’ worth of dividends.
It also now expects adjusted profit to reach $6.10 to $6.30 a share this year, up from a previous forecast of $5.85 to $6.05. Analysts had estimated $6.04 on average, according to data compiled by Bloomberg.
The company, which is run from Los Angeles, posted an $89.3 million pretax expense last quarter to account for the foreign-exchange loss. First-quarter net income fell to $74.6 million, or 74 cents a share, from $118.9 million, or $1.10, a year earlier, the company said in yesterday’s statement.
Excluding some items, profit was $1.50 a share, beating the $1.30 average of four analysts’ estimates compiled by Bloomberg. Revenue rose 12 percent to $1.26 billion in the quarter, which ended March 31, helped by a 12 percent gain in North American sales.
Net sales in Malaysia declined 47 percent in the quarter, dragged down by fresh competition, Herbalife said in a regulatory filing.
“Although we are beginning to see some positive signs that the impact is decreasing and the business is stabilizing, it is likely that the market will not fully recover until later in 2014,” the company said.
Stiritz, the Herbalife shareholder who also serves as CEO of Post Holdings Inc., said last year that he’d be willing to take part in a buyout of Herbalife if that came to pass. He said yesterday that stock buybacks could be a move toward that end.
“You can go private immediately or you can do it over time,” he said. “You can take a bite and eliminate a sucker all at one time or you can have an all-day sucker where you shrink the shares slowly over time.”