Is downtown-based Herbalife Nutrition Ltd. losing some of its mojo?
Maybe. Herbalife stock started sliding in February after its year-end earnings report and has lost nearly half of its value since then, substantially outpacing the overall drop in the markets.
Not helping was a first-quarter earnings report that was weak compared to 2021, with revenue down 11% to $1.33 billion and net income down about 33% to $98 million.
Herbalife sells a range of nutrition products using a network of more than 6 million distributors – which it calls members – in 95 countries. The products are for a variety of uses, including weight management, fitness, nutritional supplements and skin/body care.
In its earnings report issued on May 3, Herbalife attributed some of the sales slowdown to its newest group of distributors.
Herbalife Chief Executive John Agwunobi provided some additional insight in the teleconference call following the earnings release.
“Most of the distributors that joined Herbalife during the pandemic have never been to an in-person event, and there is no substitute for gathering in person for learning, collaborating and motivating,” he said.
Toward the end of the first quarter, Herbalife began reinstituting in-person distributor events.
“The interactive discussions, the face-to-face team building and the social elements that are characteristic of our in-person events are not only an important source of training, motivation, and inspiration for our distributors, but also strengthen the social fabric that our business thrives on,” Agwunobi said in the earnings announcement.
Herbalife Chief Financial Officer Alex Amezquita provided a bit more insight on the company’s approach to solving this problem in the earnings conference call.
“It’s a matter of reengaging the cohort that’s underperforming and bringing in new layers of new distributors into this new environment,” Amezquita said. “It’s not an overnight switch, right? This is a gradual improvement, but hopefully, we can start seeing some of that gradual improvement soon – certainly this year – and we expect the back half of this year to see some improvement over what we’re seeing now.”
Lowered expectations
In addition to the return of in-person sales events, Herbalife said it has implemented numerous sales initiatives at a local level that are aimed at driving increased engagement in the business.
But the company said this would take time and therefore lowered its 2022 revenue guidance to a decrease of between 4% and 10% compared to 2021, as opposed to earlier guidance of flat to 6% sales growth compared to last year.
The lowered guidance led to a selloff in Herbalife stock, with the share price plunging 22% over the next week to $21.27. Shares have traded in a fairly narrow range since then, closing June 21 at $23.36. A year ago, the stock traded at $53 a share.
Besides the difficulties with its newest cadre of distributors, Herbalife has dealt with other headwinds. After Russia’s Feb. 24 invasion of Ukraine, the company immediately stopped shipping product to Russia. And of course, sales in war-torn Ukraine have also plummeted.
In the company’s conference call with investors, Agwunobi said the company has cut $120 million in forecast sales volume for the rest of 2022 from the loss of business in those two countries.
And then there’s inflation. The company said in its earnings release that costs increased for both inputs to its nutrition products and for transporting the products to its global markets. Agwunobi added in the conference call that this has cut into margins.
Herbalife had started implementing price increases for its nutritional products in the first quarter to offset some of these inflationary pressures. But the company announced in its earnings release that it had expanded its price increases to almost all of its major markets during the second quarter.
However, Agwunobi said, price increases are not a panacea.
“It (increasing prices) doesn’t get us all the way there because clearly, we have to thread the needle between pricing, demand and making sure that the channel can still be successful,” he said.
On top of all this, the Covid-19 pandemic is still negatively impacting the company. During the first quarter, Herbalife said in its earning statement, the recent Covid-19 wave in the Asia-Pacific and South and Central America markets negatively impacted its business. And the lockdown in Shanghai and other key Chinese cities has exacerbated Herbalife’s ongoing sales challenges in that country. Those challenges date back to the earliest wave of the pandemic, in winter 2020, when Chinese factories shut down, including the plants making Herbalife’s nutrition products.
The company said in the earnings release that if it can turn around the sales performance of its pandemic cadre of distributors and implement the appropriate level of price increases to improve margins, it can return to year-over-year net sales growth by the fourth quarter.
In the meantime, in an attempt to boost share values Herbalife is in the midst of a stock buyback program. The company executed roughly $102 million in share repurchases during the first quarter and has promised further repurchases from the $570 million it has in available cash.
