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Is Soft Volume a Concern for Herbalife (HLF) in Q3 Earnings?

Herbalife Ltd. HLF is slated to release third-quarter 2017 results on Nov 2. The question lingering in investors’ minds is, whether this provider of nutrition and weight management solutions will be able to post a positive earnings surprise again in the to-be-reported quarter. Notably, the company has topped earnings estimates for 11 consecutive quarters now. The stellar earnings surprise record has also helped Herbalife to surge 49.5% year to date, as against the industry’s 18% decline.

 



However, Herbalife has lately been suffering soft volumes owing to new stringent FTC regulations in the United States and weakness in its Mexico operations. These factors, which hurt sales in the last quarter, may impact results in the third quarter as well. So let’s see how things are shaping up prior to this announcement.

What to Expect?

The current Zacks Consensus Estimate for the quarter under review is pegged at 82 cents, reflecting a year-over-year decline of 32.2%. The earnings estimate has been stable in the last 30 days. Further, analysts polled by Zacks expect revenues of $1,086 million, down roughly 3.2% from the year-ago quarter.

Herbalife LTD. Price and EPS Surprise
 

Herbalife LTD. Price and EPS Surprise | Herbalife LTD. Quote

 

Factors at Play

While Herbalife posted strong earnings in the second quarter, sales declined year over year for the third straight time. Second-quarter sales were mainly dented by soft volumes, owing to new stringent FTC regulations in the United States, softness in its Mexico operations and price hike in China. While the company anticipated that results in the United States and China would be drab, Mexico's volume was lower than expected and declined after six straight quarters of growth.

The company expects short-term volume softness due to the current transformation period, as distributors have shifted their attention from building their businesses to focusing on learning new tools and procedures, and business techniques. As for the third quarter, Herbalife expects sales in the range of flat to a decline of 5% due to a decline in volume which ranges from 2-7% in the third quarter.

However, we commend Herbalife’s solid expense management, which also helped it offset the weak sales and deliver earnings growth in the last quarter. Also, during second-quarter conference call, the company stated that it anticipates significant sequential improvements later in 2017.  Notably, the second-quarter earnings also gained partly as some marketing and promotional costs were delayed from the second quarter to the back half of the year. This remains a hurdle for the upcoming quarter. Additionally, unfavorable currency translations remain a threat for Herbalife.

Considering all factors, management projected adjusted earnings per share for the third quarter in the range of 65-85 cents per share, including an unfavorable currency impact of nearly 5 cents and a considerable part of the delayed expenses discussed above. While focus on disciplined expense management and technological innovations bode well, the aforementioned hurdles are likely to hinder Herbalife’s earnings growth this quarter.

What the Zacks Model Unveils?

Our proven model does not conclusively show that Herbalifeis likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Herbalife currently carries a Zacks Rank #3. However, the company currently has an Earnings ESP of 0.00%. The combination of Herbalife’s Zacks Rank #3 and ESP of 0.00% makes surprise prediction difficult.

Stocks With Favorable Combination

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post earnings beat:

Avon Products, Inc. AVP has an Earnings ESP of +2.94% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ralph Lauren Corporation RL has an Earnings ESP of +2.63% and a Zacks Rank #2.

The Hain Celestial Group, Inc. HAIN has an Earnings ESP of +5.22% and a Zacks Rank #2.

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