Herbalife Ltd. (HLF) is a global nutrition company that has been empowering individuals to lead healthier, more active lives for over four decades. Founded in 1980, Herbalife has evolved from a small direct-selling business to become the second-largest public direct-selling company in the world, operating in 95 markets globally.

Business Overview and History

Herbalife was established in 1980 by Mark Hughes, who envisioned creating a company that would improve people's lives through optimal nutrition and an entrepreneurial business opportunity. Starting out of the trunk of his car, Hughes built Herbalife into a global nutrition powerhouse, pioneering the direct-selling model and introducing a range of science-backed weight management, targeted nutrition, energy, sports, fitness, and personal care products.

In 2003, Michael Johnson joined the company as CEO, bringing his expertise from the entertainment industry to Herbalife. Under Johnson's leadership, the company experienced significant growth in sales and profitability while expanding into new international markets. However, this period was not without challenges, as Herbalife faced accusations of operating a pyramid scheme in the mid-2000s, leading to increased regulatory scrutiny and legal battles.

A major milestone in Herbalife's history came in 2016 when the company reached a settlement with the Federal Trade Commission (FTC). This agreement required Herbalife to pay a $200 million fine and make substantial changes to its business model. While the settlement resolved the multi-year FTC investigation, it continued to impact the company's operations and reputation in subsequent years.

Despite these challenges, Herbalife has maintained its position as a leading global nutrition company. The company's network of independent distributors, known as Members, continues to be the primary channel for selling products directly to consumers across over 90 markets worldwide. Herbalife has demonstrated resilience by adapting its business model and practices to navigate the evolving regulatory environment while remaining a major player in the nutrition and wellness industry.

In 2024, Herbalife announced a significant leadership transition, with Stephan Gratziani, a former long-time Herbalife distributor, taking over as the company's new CEO. Gratziani's appointment underscores Herbalife's commitment to its direct-selling roots and its vision to become the world's premier health and wellness platform.

Financial Performance and Outlook

Financials

Herbalife's financial performance in recent years has been marked by both challenges and progress. In 2024, the company reported net sales of $4.99 billion, a 1.4% decrease from the previous year on a reported basis. However, on a constant currency basis, net sales grew 1.2% year-over-year, demonstrating the underlying strength of the business.

The company's adjusted EBITDA for 2024 was $635 million, up from $571 million in 2023, and its adjusted EBITDA margin expanded by 140 basis points to 12.7%. This improvement was driven by the company's pricing actions, manufacturing efficiencies, and various cost-saving initiatives implemented during the year.

For the full year 2024, Herbalife reported net income of $254.3 million, or $2.50 per diluted share, up 78.8% from the prior year. This significant increase was primarily due to a $145.7 million lower income tax expense, mainly from deferred tax benefits related to the company's corporate reorganization, and $26.2 million lower royalty overrides, partially offset by $51.6 million higher net interest expense.

In the most recent quarter (Q4 2024), Herbalife reported revenue of $1.207 billion and net income of $177.9 million. Net sales decreased 0.6% on a reported basis but increased 2.7% on a constant currency basis compared to the same quarter in the previous year. The decrease was primarily driven by lower sales volume, partially offset by favorable pricing.

Operating cash flow for the full year 2024 was $285.4 million, while free cash flow stood at $163.4 million.

Performance by Geographic Markets

Herbalife operates in five geographic regions: North America, Latin America, EMEA (Europe, Middle East, and Africa), Asia Pacific, and China. In Q4 2024:

• North America net sales decreased 3% year-over-year, driven by lower volume.
• Latin America net sales increased 2% on a reported basis and 15% on a local currency basis, driven by favorable pricing and higher volumes.
• EMEA net sales increased 3% on a reported basis and 6% on a local currency basis, driven by favorable pricing and sales mix, partially offset by volume declines.
• Asia Pacific net sales increased 1% on a reported basis and 3% on a local currency basis, driven by favorable pricing.
• China net sales decreased 20% on both a reported and local currency basis, driven by volume declines.

Liquidity

As of December 31, 2024, Herbalife reported cash and cash equivalents of $415.3 million. The company had $355 million of available borrowing capacity under its $400 million revolving credit facility. Herbalife's debt-to-equity ratio stood at -0.565 (negative due to negative shareholders' equity), while its current ratio was 0.929 and quick ratio was 0.543.

Guidance and Outlook

Looking ahead, Herbalife has provided guidance for 2025 that reflects the impact of macroeconomic factors, particularly foreign exchange headwinds. For the full year 2025, the company expects:

• Net sales to decline between 3% to 3% year-over-year on a reported basis, but to grow between 1% to 7% on a constant currency basis.
• Adjusted EBITDA to be in the range of $600 million to $640 million, or $670 million to $710 million on a constant currency basis.
• Capital expenditures of $100-130 million and capitalized SaaS implementation costs of $25-30 million.
• An adjusted effective tax rate of approximately 30%.

For Q1 2025, Herbalife expects:

• Net sales to be down 1.5% to 5.5% year-over-year, including a 550 basis point headwind from currency. On a constant currency basis, Q1 net sales are expected to be flat to up 4% year-over-year.
• Adjusted EBITDA of $140-150 million, or $158-168 million on a constant currency basis.

It's worth noting that Herbalife's Q4 2024 adjusted EBITDA of $150 million significantly exceeded their guidance range of $105-135 million for that quarter.

Operational Highlights and Strategic Initiatives

One of Herbalife's key operational highlights in recent years has been the improvement in its distributor-related metrics. In 2024, the company saw a 22% year-over-year increase in new distributors, marking the third consecutive quarter of growth. Additionally, the total number of active non-sales leaders, which includes members and markets without separate distributor and preferred customer programs, grew by double digits in the fourth quarter, following three years of declines.

These positive trends in Herbalife's distributor base have been driven by the company's strategic initiatives, such as the rollout of the Herbalife Premier League, a program that incentivizes distributors to focus on recruiting and activating new members. The company has also enhanced its distributor training and support programs, including the Diamond Development Mastermind and DMO Masterclasses, to better equip its sales force for success.

Herbalife's vision to become the world's premier health and wellness platform is further reflected in its ongoing investments in technology and digital capabilities. The company is in the midst of a multi-year, $400 million Digital Technology Program, which aims to provide its distributors and customers with enhanced digital tools and experiences.

Product Segments and Overview

Herbalife Nutrition operates in five major product categories:

1. Weight Management: This category accounted for 55.4% of net sales in 2024 and includes meal replacement shakes, protein drinks, weight loss supplements, healthy snacks, and metabolism-boosting teas. The company's flagship Formula 1 Healthy Meal is its best-selling product line, approximating 26% of net sales.

2. Targeted Nutrition: Making up 29.7% of net sales, this segment includes functional beverages and dietary supplements containing herbs, vitamins, minerals, and other natural ingredients. Key products in this category include Herbal Aloe Concentrate, Active Fiber Complex, and Herbalifeline.

3. Energy, Sports, and Fitness: Accounting for 11.5% of net sales, this category features products that support an active, healthy lifestyle, such as the Herbalife24 line, N-R-G Tea, and Liftoff energy drink.

4. Outer Nutrition: Representing 1.7% of net sales, this segment includes facial skin care, body care, and hair care items, such as the Herbalife SKIN line and Herbal Aloe Bath and Body Care line.

5. Literature, Promotional, and Other: This category, also representing 1.7% of net sales, encompasses startup kits, sales tools, and educational materials like Herbalife Member Packs and BizWorks.

The company's science-backed products are a core driver of its business, and it continues to invest in research and development, quality control, and regulatory affairs to create new and enhance existing offerings. Herbalife utilizes its global network of independent members to distribute and market these nutrition products worldwide. The company's direct-selling model, which provides personalized support and education to customers, is a key differentiator and has been central to its 45-year history of growth and success.

Risks and Challenges

While Herbalife has demonstrated resilience and adaptability in the face of various challenges, the company continues to navigate a complex and evolving operating environment. Key risks and challenges include:

1. Regulatory Scrutiny: Herbalife's direct-selling business model has faced regulatory scrutiny in the past, with the company entering into a consent order with the U.S. Federal Trade Commission in 2016. Ongoing compliance with regulatory requirements remains a critical focus area.

2. Market Competition: Herbalife operates in a highly competitive landscape, with both traditional and emerging players vying for a share of the health and wellness market. The company's ability to differentiate its products and services, as well as its distributor network, is crucial.

3. Macroeconomic Factors: Herbalife's global operations expose the company to various macroeconomic risks, such as foreign exchange fluctuations, trade tensions, and inflationary pressures, which can impact its financial performance.

4. Distributor Engagement and Retention: Maintaining high levels of distributor engagement and sales leader retention is essential for Herbalife's continued growth and success. The company's ability to provide its distributors with the necessary tools, training, and support is critical.

Industry Trends and Growth Drivers

While specific industry CAGR figures were not provided, Herbalife has highlighted several global trends that have been driving its success over the past 45 years:

1. The Obesity Epidemic: The increasing prevalence of obesity worldwide has created a growing demand for effective weight management solutions.

2. Rising Interest in Fitness and Healthy Lifestyles: As more people become health-conscious, there is a growing market for nutrition and wellness products.

3. The Rise of Entrepreneurship: The direct-selling model aligns with the increasing desire for flexible work arrangements and entrepreneurial opportunities.

These trends continue to shape the health and wellness industry, presenting both opportunities and challenges for companies like Herbalife.

Conclusion

Herbalife Ltd. is a global nutrition company with a rich history and a vision to become the world's premier health and wellness platform. Under the leadership of new CEO Stephan Gratziani, the company is poised to leverage its robust direct-selling model, innovative product portfolio, and strategic investments in technology to drive sustainable growth and deliver value to its distributors, customers, and shareholders.

Despite the challenges it has faced, Herbalife has demonstrated resilience and adaptability, positioning itself as a unique player in the dynamic health and wellness industry. As the company continues to execute on its strategic initiatives and navigate the evolving market landscape, investors will be closely watching Herbalife's ability to capitalize on the growing consumer demand for science-backed nutrition and wellness solutions.