Herbalife Ltd. (NYSE:HLF) shares are tanking more than 5% this morning on heavy volume as reports suggest the head of Herbalife’s China operations has been removed. The report, courtesy of China Securities Journal, comes on the heels of HLF stock reaching a three-year high of $73.61, just 8.3% below its 12-month consensus target.
According to the report, the removal of the Herbalife’s China head was “sudden,” especially considering that HLF’s first-quarter earnings report showed strong growth in China. Specifically, Chinese volume grew 17% while net sales saw an increase of 5% (excluding FX).
From its Q1 report:
“China sales and volume significantly exceeded expectations primarily due to the impact on timing of sales and volume resulted from a price increase announced in March 2017, effective April 1st, 2017, that we believe shifted member purchases into the first quarter that would likely have been made in the second quarter of this year. The expected negative impact to second quarter sales and volume is included in current guidance.”
Herbalife also noted, however, that it faced certain risks in China. Namely, “uncertainties relating to interpretation and enforcement of legislation in China governing direct selling and anti-pyramiding” and an “inability to obtain the necessary licenses to expand [its] direct selling business in China.”
As notorious HLF stock bear and activist investor Bill Ackman previously noted, though, second-quarter results for China “are likely to be down significantly.” Ackman also noted that while HLF achieved considerable volume and sales growth, it actually declined some 17% to 20% on a normalized basis.
No word from Herbalife yet regarding the departure of its China head, but with HLF stock down 5.5%, investors definitely aren’t treating this as “fake news.”
