Herbalife, locked in a 16- month fight with hedge fund manager Bill Ackman, has just got some fresh ammunition.
The seller of vitamins and weight-loss shakes posted higher-than-projected earnings and increased its forecast on Monday, offering evidence that the business remains healthy.
It will also free up more cash for stock buybacks by suspending its dividend – a move applauded by its largest shareholder, billionaire Carl Icahn.
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 US regulators and law enforcement, which are investigating claims it is a pyramid scheme.
The probes were spurred by a barrage of criticism from Ackman, who has waged a battle to shut down the company since December 2012.
He bet $1 billion (R10.6bn) against Herbalife, saying it misleads distributors, misrepresents sales figures and sells a commodity product at inflated prices.
The results showed “the strength of Herbalife’s business model”, said Bill Stiritz, Herbalife’s fourth-largest shareholder. “That’s what’s defeating Ackman.”
The dividend suspension may buy chief executive Michael Johnson more time as he waits for multiple investigations to play out. The US Federal Trade Commission and the FBI have started investigating its practices, contributing to a 25 percent decline in Herbalife’s share price this year.
The stock fell less than 1 percent to $58.44 in extended trading after Monday’s earnings report. Shares had closed 1.8 percent higher at $58.85 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, his firm has two executives on the board, with three others set for election yesterday. 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 be as high as $581m in the current quarter, helping to reward investors. It plans to use the cash it would have paid during the next eight quarters’ worth of dividends.
It expects adjusted profit to be between $6.10 and $6.30 a share this year, up from a previous forecast of $5.85 to $6.05.
The company, which is run from Los Angeles, posted an $89.3m pretax expense last quarter to account for a foreign exchange loss. First-quarter net income fell to $74.6m, or 74c a share, from $118.9m, or $1.10, a year earlier, it said on Monday.
Excluding some items, profit was $1.50 a share, beating the $1.30 average of four analyst estimates by Bloomberg.
Revenue rose 12 percent to $1.26bn in the quarter to March, helped by a 12 percent gain in North American sales.
Net sales in Malaysia declined 47 percent, 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 stabilising, it is likely that the market will not fully recover until later in 2014,” it said.
Stiritz said last year that he would be willing to take part in a buyout of Herbalife if that came to pass. He said stock buybacks could be a move towards 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.” – Bloomberg