Herbalife trims earnings outlook for the year, discloses SEC inquiry into possible corruption in China

In a prospectus for its $1.325B debt facilities, Herbalife (NYSE:HLF) reports that its expects Q4 GAAP and non-GAAP EPS to be within the previously announced ranges of $0.90 – 1.10 and $0.80 – 1.00, respectively. Volume will be toward the low end of guidance, however. Other highlights:

EPS guidance for 2017 lowered to $3.55 – 3.95 from $3.95 – 4.35. Non-GAAP EPS lowered to $4.20 – 4.60 from $4.60 – 5.00.

The SEC’s investigation into possible corruption in China is ongoing, company documents requested. In parallel, the company is conducting its own review. It has discussed both inquiries with U.S. Department of Justice.

Pursuant to the FTC Consent Order, ~200K participants have been classified as “preferred” members, those who only purchase products at a discount. Beginning in mid-January, all new members must select either “preferred member” or “distributor” when they enroll. Members receive 25 – 50% discount on products purchased. Over 70% of Members purchase products for their own consumption.

4.1M current Members, ~300K in China.

It is developing a receipt system that will enable it to better track and illustrate retail consumption. It will be used to drive rewards to distributors. Royalties up to 15% are paid on purchases by other members up to three levels below the distributor. A bonus up to 8% is paid based on volume points.  Total multi-level compensation for each sale is 23%. Sales Leaders are those who accumulate at least 4,000 Volume Points during any consecutive 12-month period.

The company cannot increase its rewards on documented sales by more than 110% of current levels. If it can appropriately document 80% of its U.S. sales, there is no limit on the awards it can provide on such sales. No more that 1/3 of the rewards can come from personal consumption.