Herbalife Shares Fall After Company Defends Itself - NYTimes.com:
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HerbalifeHerbalife, a maker of nutritional supplements and protein bars, recruits others to do its selling.
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HEDGE FUNDS 20 Comments
Herbalife Shares Fall After Company Defends Itself
BY WILLIAM ALDENHerbalifeHerbalife, a maker of nutritional supplements and protein bars, recruits others to do its selling.
Herbalife sought on Thursday to counter accusations that the company was a fraud, but it appeared that investors were still trying to decide.
After climbing as high as 7.6 percent in the morning, shares of Herbalife, a nutritional supplement company, declined 1.8 percent, to close at $39.24. Last year, the stock traded as high as $72.69.
In a two-and-a-half-hour presentation for investors and analysts Thursday morning, Herbalife executives responded to arguments made in December by the hedge fund manager William A. Ackman, when he announced that his company, Pershing Square Capital Management, was betting against Herbalife’s stock. Mr. Ackman had called Herbalife a pyramid scheme, a charge that the executives vehemently denied.
Herbalife is a “legitimate company, with legitimate customers,” Michael O. Johnson, its chief executive, said. “Girl Scouts sell cookies on a direct-selling method, and nobody attacks them.”
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Mr. Ackman was not swayed by Herbalife’s defense, saying, “The company distorted, mischaracterized and outright ignored large portions of our presentation.”
After Mr. Ackman made his argument against Herbalife in December, the company’s stock price slid, falling to a low of $26.06 on Dec. 24. It subsequently recovered, and was aided Wednesday, when another hedge fund manager, Daniel S. Loeb, disclosed that his company, Third Point, had acquired an 8.2 percent stake in Herbalife, betting the stock would rise.
Other investors appear to be choosing sides. The cost of short-selling Herbalife shares rose on Thursday, indicating more interest in bearish positions, according to an analysis by Astec Analytics, a division of SunGard, a software and technology services company.
The Securities and Exchange Commission is also scrutinizing Herbalife, which operates out of Los Angeles and was incorporated in the Cayman Islands. On Thursday, Herbalife said it had been in contact with regulators but declined to comment further.
The debate centers on the business model of Herbalife, a 32-year-old company that sells nutritional supplements through a network of independent distributors. The distributors earn money from their own sales and get commissions from sales made by people they recruit.
Mr. Ackman said that model benefits those on top. But on Thursday, Des Walsh, Herbalife’s president, said 80 percent of the 100 top earning distributors make more than their sponsors, distributors who are above them in the hierarchy. He called the business a “meritocracy.”
Mr. Ackman contends that distributors make more money from their recruitment efforts than from sales outside the network.
In Thursday’s presentation in New York, Herbalife argued that its distributors counted as customers, buying products from the company to sell or use. “We know who every single one of our customers is,” Mr. Johnson said in an interview later.In addition, Herbalife argued, a significant number of sales are to customers outside the network. The company directly shipped 1.4 million orders to nondistributor customers in the United States last year, Mr. Walsh said.
Herbalife invited Anne Coughlan, a professor of marketing at the Kellogg School of Management at Northwestern University, to explain multilevel marketing plans. “When you run a legitimate M.L.M. system, self-consumption is in fact end-user consumption,” she said.
The company also commissioned a survey by Lieberman Research Worldwide, which found that 5 percent of United States households reported buying Herbalife products, and that 90 percent of the sales were outside the distribution network.
Responding to another of Mr. Ackman’s assertions, Herbalife’s chief operating officer, Richard P. Goudis, said the company invested $44 million a year in research and development.
Mr. Ackman said that Herbalife still had explaining to do. “Herbalife did not respond to our identification of overstatements and inaccuracies in the company’s earnings statement for distributors, which among other deceptions, excludes the 93 percent of distributors that have zero gross earnings,” he said in a statement.
Pershing Square said it would release questions for Herbalife and would respond in more detail to Thursday’s presentation.
Mr. Johnson declined to comment on whether Herbalife would take legal action against Mr. Ackman. But he said, “We’re going to look at every means available to protect our reputation and move this company forward.”
In a small concession to Mr. Ackman, Mr. Johnson said that Herbalife’s terminology, especially “distributor,” could be confusing and that the company was working on revisions.
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A version of this article appeared in print on 01/11/2013, on page B6 of the NewYork edition with the headline: Herbalife Defends Marketing Techniques Against Attack by Hedge Fund Manager.
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20 Comments
For example, @ Joe Copper relies upon personal experience as a distributor and make broad, generalized claims about the recruitment process fall under the broken window fallacy. Just because distributor's spends their own time and money on recruiting people does not make Herbalife's business model and less of a pyramid scheme! Use of resources ≠ economic contribution.
@MickiSue Effectively suggests that because HLF funds a lab UCLA that this lab inherently adds credibility to HLF's products and/or business model. Donating to put your name on independent research facilities does not somehow fix the fact that the products are snake oil and the business model is run like a pyramid scheme. Also, it's a nutritional lab, not a medical lab.
@MickiSue also attempts to use a straw man, Ackman's previous position in Target have little, if anything, to do with HLF. Separate companies in very unrelated business segments. Companies get upset when Einhorn calls them out, too, but it doesn't make the thesis any less true.
I sympathize that many of you have poured a lot of equity and time in to a venture that appears fraudulent. Bernie Madoff spent a lot of time building something, too, but that didn't necessarily make it legal...
Herbalife is not arguing that it's not an MLM. It IS an MLM, and they happen to be legal.
@ The Colonel: you seem to be forgetting Ackman's Target Corp fiasco. In a down economy, when Target was closing in on the nefarious WalMart, he decided to make a play to own the board of directors. After being successfully rebuffed, he's now taken all his marbles and gone home.
The reason that Ackman is going after Herbalife, and not trying to protect the many, many employees of WalMart from their horrendous employer is that WalMart isn't in direct competition with Big Pharma.
Ackman has increased his holdings in pharmaceuticals. Hmmmmm.
We fund the Mark Hughes Cellular and Molecular Nutrition Lab at UCLA's Center for Human Nutrition. David Heber is head of the department. He is in charge of our research there, and he's nationally and internationally sought after for his expertise in nutrition and obesity; and a director at NIH.
Your lack of knowledge of the ongoing efforts to improve the current product line, and to introduce well crafted new ones (our sports nutrition line is a prime example) is not an indication that the research is not being done.
No one has to like my business, or how I choose to make my living. But they have no right to attempt to destroy it. Ackman is bad person. I sincerely hope he gets what he deserves.
Ofcourse i didnt use it - and I avoid this guy all together.
"The company also commissioned a survey by Lieberman Research Worldwide, which found that 5 percent of United States households reported purchasing Herbalife products, and that 90 percent of the sales were outside the distribution network."
These two paragraphs from the above article tell you all you need to know about Herbalife...
MLM is a viable business model.
HLF Distributors operate as their own business entity.
Some people sign up just to get a lower price on the product, some see the business opportunity. "Upline" distributors only make money , serious money if they train the people they recruit to do the business. If you do not like selling, solving other people's problems, then do not associate with us. Any sales manager will tell you 80 % of the sales. Are done by 20 % of the crew. You are all welcome to your opinions, just know you are wrong.
Herbalife, Melaluca, Amway, etc. are all hybrid businesses. These MLM schemes are combinations of business and religion. Their members have faith, they believe, they need community, they need purpose, they need hope. And in a (screwy?) sort of way, MLM schemes provide this.
Clearly, they are stable business models, in much the same way as religions are. Money is flowing, or they would die, period. Are their distributors and customers being misled, lied to? Most NYT readers (and I) would say yes.
You have to separate your feelings about the business, about whether you would patronize the business, about how you'd feel if your sister got involved with the business, from whether the business makes money.
These schemes are probably no worse than Las Vegas, parts of the arms industry, the sex industry in its myriad forms, the NFL with its brain damage, in fact anything that people do that make money -- that you don't like. But sizing them up as a potential investment -- that is a completely different question.
Come on. $44 million. I believe less than half a million is done on actual science of your products.
For the record, I am not a monkey's uncle.
Anyone who has seen the bumper stickers, come ons, classic MLM exhortations will know that Herballife is a massive fraud masquerading as a legitimate firm.
Please, we are not that stupid that we would believe otherwise.
32 years covers a lot of ground; the evidence is pretty clear.
Their products seem to be ok at best and very expensive.
Come on, we all know the truth about MLMs -- all of them. The model itself is fundamentally bulls@&t.
This is how people twist the truth when dealing with numbers. When I heard the gal get up there and race through her portion, I nearly puked. When you play with numbers you can show whatever you like.
Lieberman in fact did not find that 5 percent of US households reported purchasing Herbalife products. They did a survey of 2000 households, came up with 5 percent, then extrapolated that. It was so funny as the folks who jumped up after her began talking about these millions of households purchasing Herbalife products when it's completely bogus.
I was not impressed with Herbalife's rebuttal to what Ackman has raised. They know very well that there are very few retail sales of their product, the objective is to recruit, they keep denying it, though they know very well that is how it operates and how their distributors go about their business.
This willl all end in a very ugly way.
But, since these big Wall St. guys have decided to go to war with eachother, at least us folks on Main St. can take solace in the fact that someone is going to lose a lot of money at the end of this all.
I await to hear what the SEC says.
How else do you expect them to make a determination? While I have not read their report to look at how they collected their data, as long as their 2000 household sample was random and representative of the population of the united states (Economic class, race, religion etc), one could extrapolate the data from a relatively small small sample.
Lieberman appears to be well respected in the research industry, they are not going to comprimise their reputation on a biased or unscientific survey.
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