Photographer: Scott Eells/Bloomberg

Herbalife Outlook Misses Estimates, Renewing Growth Concerns

Herbalife Ltd., the nutrition company under federal investigation for allegations of fostering a pyramid scheme, forecast 2016 earnings that missed analysts’ estimates as the strong dollar continues to weigh on overseas sales.

Earnings will be $4.35 to $4.75 a share next year, excluding some items, the Los Angeles-based company said in a statement Tuesday. Analysts had estimated $5.18 on average, according to data compiled by Bloomberg. The forecast includes a 50-cent hit from currency. Net sales are projected to increase as much as 7.5 percent.

"The challenge is the currency headwind," Chief Financial Officer John Desimone said on a conference call with analysts.

The forecast renewed concerns that Herbalife will struggle to maintain growth, hurt by the currency effects and pressure brought by regulatory scrutiny. The company has waged a high-profile battle with billionaire Bill Ackman since December 2012, when the hedge fund manager accused the company of running an illegal operation and announced a $1 billion bet against its stock. While Herbalife has repeatedly denied Ackman’s accusations, his campaign led to probes by the U.S. Federal Trade Commission and law enforcement.

The shares fell 3.3 percent to $55.92 at the close in New York. The stock had gained 53 percent this year through Tuesday’s close, bolstered by optimism that it will overcome its criticism and fuel growth overseas.

Third Quarter

Even as next year’s forecast fell short of estimates, Herbalife’s third-quarter earnings handily beat projections. Profit in the period was $1.28 share, excluding some items, compared with an average estimate of $1.05. Sales dropped for the fourth straight quarter, though, dragged down by the strong dollar. They declined 12 percent to $1.1 billion, missing projections for $1.15 billion.

Throughout Ackman’s attacks, China has continued to be a bright spot for the company. Sales surged 41 percent there last year to $664.3 million and gained an additional 24 percent last quarter. Many of the company’s other regions, including Mexico and South America, have been hampered by the dollar, reducing the revenue generated there. Total revenue would have risen 5 percent last quarter excluding the effects of currency, the company said.

Ackman’s campaign also has affected Herbalife’s growth rate. Last year, the company changed how it deals with independent distributors, part of efforts to reassure investors and regulators that its business is legitimate. Those distributors, which acquire weight-loss shakes and other products from Herbalife and then sell them to others, now have more time to meet sales goals. That means some of them aren’t buying inventory from Herbalife as quickly as they used to.

Business Model

The distributors are at the center of debate about Herbalife’s business model. The company, which is considered a multilevel-marketing firm, only sells products through these outside contractors. They then make money in two ways: selling products to consumers or being compensated for the orders made by people they recruited to become distributors.

One of the major questions is how many of the products actually end up being used by consumers. The telltale sign of a pyramid scheme, according to the U.S. Federal Trade Commission, is that there’s no legitimate demand for a company’s products. Instead, sales are driven by new distributors piling up boxes of products to meet sales goals.

Herbalife doesn’t track how many products are sold by distributors. It has offered survey data from third parties that it commissioned, though. One study showed that 7.9 million U.S. adults bought its products for personal use in a three-month period and 13 percent of those were distributors.

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