FTC Settlement Hurts Otherwise Record Quarter for Herbalife

Herbalife (NYSE:HLF) reported positive sales and earnings growth for its second quarter (2Q) ended June 30, when adjusting for a US$203 million payment during the quarter to settle its case with FTC. Sales grew 3 percent (10 percent when excluding currency effects) for the quarter compared to the same quarter last year. Excluding the one-time payment and adjusting for currency fluctuations, earnings rose 4 percent to $1.29 per adjusted diluted share, compared to $1.24 per share a year ago, beating company expectations. Without the adjustments, the bottom line fell to a net loss of $22.9 million or $0.28 per diluted share, a marked change from $82.8 million or $0.97 per diluted share earned in 2Q2015.

In a conference call, Johnson told reporters worldwide volume points grew 9 percent compared to the second quarter last year with approximately 80 percent of the company’s markets reporting an increase in volume points. Additionally, four of its six regions: EMEA (Europe, Middle East and Africa), United States, Mexico, and China achieved record-high volume points.

 “This has been a historic quarter for Herbalife, with worldwide record setting volume points and new volume point highs in four out of our six regions," said Michael O. Johnson, chairman and CEO of Herbalife, in a press release. “This momentum reflects the strength of our distributors' businesses and with the FTC settlement announcement, I am more confident than ever in Herbalife's future."

As part of the settlement with FTC, which had alleged the company used an unfair compensation structure, Herbalife agreed to significant changes in how it operates its direct-selling business. The company promised to only make truthful claims about how much money its members can make and base its compensation of members on actual retail sales, not how many new members they recruit.

In response to the settlement, Herbalife said it voluntarily established an Oversight Committee of the Board to handle full compliance with the terms of the agreement. The company also assigned Pamela Jones Harbour, currently Senior Vice President of Global Member Practices and Compliance and former FTC Commissioner, to oversee implementation of new distributor compliance initiatives. Management also said most of the changes agreed to in the settlement had either already been implemented or would be in place within ten months from the settlement.

Among the changes, members will be designated as either preferred members who purchase for their own use, or as distributors for the selling of product to other consumers.  These distributors will be compensated based on actual retail sales, verified by receipts, as well as by personal consumption of product within allowable limits. Distributors will also receive more company training and have more time to return an initial membership pack.

"After more than two years of working with the FTC, I think we understand the terms of the settlement agreement very well," said Alan Hoffman, executive vice president, global corporate affairs, Herbalife, in a statement. “We would not have settled unless we had the greatest confidence in our ability to comply with the agreement and grow our business and we believe this will be proven out over time."

Directly after the settlement was announced mid-July, HLF shares hovered between $65 and $70 per share. It traded between $66 and 68 per share following the release of second quarter results.

“With the FTC settlement now behind us, we can turn our focus entirely on our future and making positive health impacts across the world," Johnson told reporters.

Looking ahead, Herbalife said it expects strong volume points to continue, and with more favorable impact from currency fluctuations predicted its earnings guidance range between $0.74 and $0.84 per diluted share for third quarter (3Q) and between $2.30 and $2.60 per diluted share for fiscal year 2016 (FY2016). Factoring in Price changes in Venezuela, regulatory and implementation charges, and various accounting factors, earnings projections were set at $0.98 and $1.08 per adjusted diluted share for 3Q and between $4.50 and $4.80 per adjusted diluted share.