What's In Store For Herbalife (HLF) This Earnings Season?

Herbalife Ltd (NYSE:HLF) is set to report first quarter 2016 results on May 5 after the market closes. Last quarter, it posted a positive earnings surprise of 29.35%.

In fact, this weight management and nutritional products company posted positive earnings surprises in the last four quarters, generating an average positive earnings surprise of 21.93%.

Let's see how things are shaping up for this announcement.

Factors to Consider this Quarter

For the first quarter of 2016, Herbalife expects sales to decline in the range of 3%-6% and volumes to be in a range of down 1.5% to up 1.5%. On a currency adjusted basis (excluding the impact of Venezuela price increases tied to foreign exchange rate movements), sales are expected to increase 2.5% - 5.5%.

For the first quarter, the company expects adjusted earnings per share in a range of 97 cents to $1.07 per share, which includes an unfavorable currency impact of approximately 27 cents per share. Excluding currency impact (excluding the impact of Venezuela price increases tied to foreign exchange rate movements), adjusted earnings are expected in a range of $1.24 to $1.34 per share.

We note that the company is witnessing volume improvement in key markets including the U.S., Mexico and Brazil, as a result of strategic decisions taken to improve the business and tremendous leadership by all the senior sales leaders. The company anticipates that these important and effective changes will in turn improve volume growth in the to-be-reported quarter.

However, the company continues to face volume declines, particularly in the Americas region, which is weighing on its sales. Unfavorable currency is also a major headwind for the company and will continue to hurt earnings in the to-be reported quarter.

Also, the company has been the target of activist investor William Bill Ackman, hedge fund manager of Pershing Square (NYSE:SQ) Capital Management since Dec 2012. Ackman believes that the company was running a pyramid scheme business model, in which profits are largely derived from recruiting new distributors and not from selling products. Such models are illegal because they eventually collapse once there are no more people to recruit. He also launched his $1 billion short position in Herbalife shares in 2012.

Since then Ackman has been trying every means to prove that Herbalife runs a pyramid scheme model. However, Ackman's back-to-back allegations prompted a civil investigative demand in 2014 from the FTC related to the company’s marketing practices. Herbalife is reportedly in talks with the U.S. Federal Trade Commission (‘FTC’) about resolving a probe into whether the company is a pyramid scheme.

Earnings Whispers?

Our proven model does not conclusively show that Herbalife is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: Earnings ESP for Herbalife is 0.00% as both the Most Accurate Estimate and the Zacks Consensus Estimate stand at $1.07 per share.

Zacks Rank: Herbalife has a Zacks Rank #2 (Buy). Although this increases the predictive power of ESP, the company’s 0.00%ESP makes surprise prediction difficult.

We caution against stocks with Zacks Rank #4 or #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Stocks in the consumer staples sector that have both a positive earnings ESP and a favorable Zacks Rank are:

Church & Dwight Co. Inc. (NYSE:CHD) with an Earnings ESP of +1.19% and a Zacks Rank #2.

Estee Lauder Companies, Inc. (NYSE:EL) with an Earnings ESP of +1.67% and a Zacks Rank #2

Avon Products, Inc. (NYSE:AVP) with an Earnings ESP of +50.00% and a Zacks Rank #3 (Hold).