On the surface, Herbalife's numbers were great. The company reported EPS of $1.27 on expectations of a $1.06 print. The company also boosted its EPS forecast for the full year from a range of $4.45-$4.60 to $4.60-$4.80, putting the Wall Street forecast of $4.66 plainly in the achievable zone. Finally, HLF reported $137MM in cash from operations (compared to $120MM a year ago), which net of CapEx of $24.8MM means Free Cash Flow by that definition of $112.7MM, above the $96MM reported a year earlier. And yet, not even all the cash generated from operations was enough for HLF to fund just its stock buyback in the quarter which amounted to $164.5 million resulting in the Diluted share count plunging from 122.4 million to 108 million.
So far so good. There is, however, a "yes but...."
In the "yes but" category, on one hand we notice first of all that growth rates are slowing down.
On the other, the implied tax rate was 27.3% in the quarter, compared to 29.2% in the prior quarter.
But most disturbing was the third hand and that the company decided to pro forma out of Net Income the following two items:
- Venezuela devaluation impact, which accounted for $10.5 million in net income addbacks, or $0.10 EPS, and
- Expenses incurred responding to attacks on the Company's business model, accounting for $8 million in net income addbacks and $0.07 EPS
HLF spent $8 million to defend itself against Ackman? Really? It is an accepted non-GAAP addback to exclude costs used to fund a mudslinging campaign? Which law firm was charging tens of thousands of dollars per hour to script the CEO and to make the anti-Ackman website we wonder.
Said otherwise had the company used the last quarter's tax rate, and not excluded these items, its EPS would have been right on top of expectations if not under. And of course, had the company not bought back as many shares as it did this quarter, EPS would have been a miss. Perhaps this explains the swing in the stock after hours from up 2% to red now.
Now the focus shifts to the earnings call, where much more will be discussed on the company's distributor network.
Of course, the Icahn put here is rather paradoxical: the billionaire investor will never admit defeat even in light of a seemingly deteriorating business model, and the more the stock drops, the higher the probability that he will either continue to buy the stock in the open market, or tender outright, just so he doesn't lose out to Ackman.
May the billionaire with the most free time on their hands (and highest ATM balance win).