Herbalife: Is The Top In On America Sales?

Jul.30.14 | About: Herbalife Ltd. (HLF)

Summary

North American sales are looking toppy.

Acceleration has turned from deceleration to flattening.

Next up to look for is possible declining North American sales.

The confetti from the anti-Ackman celebration-rally hadn't even reached the ground yet when Herbalife (NYSE:HLF) reported its party-crashing numbers that went over with the market like a fart in church. Yes, estimates were that far off and EPS was actually up 10% year over year (solely due to a buyback), but the most worrisome part of the numbers, for me at least, was what's going on in the good ole US of A.

There are very smart people on both sides of the Herbalife trade who either swear it's a pyramid scheme or swear everything Herbalife is doing is perfectly legal. What the regularities will ultimately decide is anybody's guess and for now the jury is still out. Perhaps that will literally be so soon. One thing I think both sides could agree on is that if Herbalife is a pyramid scheme, the first place it should naturally implode is the same place it was founded over two decades ago which is North America.

I've been tracking the North American sales specifically to try to learn any patterns that may develop. Below is the table:

2010

2011

YOY % Gain

2012

YOY % Gain

2013

YOY % Gain

2014

YOY % Gain

Q1

151,259

167,000

10.41%

210,710

26.17%

221,473

5.11%

247,860

11.91%

Q2

166,437

185,159

11.25%

224,661

21.33%

247,564

10.19%

250,601

1.23%

Q3

155,532

180,735

16.20%

208,819

15.54%

228,660

9.50%

Q4

140,898

165,737

17.63%

197,052

18.89%

210,302

6.72%

Click to enlarge

Source: Herbalife press releases

Here are some observations. First, Herbalife did indeed hit record sales for the second quarter during Herbalife's clearly seasonally best quarter. That's a good thing, at first look, from a numbers and investing perspective. Second you can see that the acceleration of sales growth has turned to deceleration. Sales growth is still a good thing, mind you, but the solid teens and twenties percentile level in sales growth appears to be a thing of the 2012 past.

For all of 2013 and the first quarter of 2014, you have gains of between 5.11% and 11.91%. Not as robust as before, but it still wasn't too shabby. But then you have this past second quarter with a paltry gain of 1.23%. Volume points were down 1%. For all practical purposes, both were basically flat. Based on the history of seasonality, we should see North American sales plunge over the next two quarters.

During the conference call, President Des Walsh stated, "The North American region and specifically the U.S. market came in below expectation in terms of volume point partially due to the very difficult comparison from prior year period." I'm not sure what was so difficult about it. The year-ago period in 2013 was only up 10.19% which was a smaller percentage gain than any quarter at all in 2011 or 2012.

Does this single quarter mean absolutely a top is in, it's a pyramid scheme, and it will implode? Not necessarily. It's too early to make a definite call based on a pattern of one quarter, but it is worth keep a close eye on North American sales specifically for signs of weakness. Herbalife may grow sales and even earnings (real earnings, not just EPS from a one-time huge buyback), but if you pay attention closely to North American sales you may have an edge on either a long-overdue pyramid implosion or, perhaps the opposite - a sign that momentum is continuing in the mother region.

Disclosure: The author is short HLF. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have Herbalife call options.