This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Herbalife Skips a Knockout Blow

Updated to include Bill Ackman comments and late afternoon share prices.

NEW YORK ( TheStreet) -- After weeks of anticipation, Herbalife (HLF - Get Report) defended itself against claims made by hedge funder Bill Ackman that the direct seller of nutritional supplements is a pyramid scheme.

Herbalife fired back with data that put the figures and analysis behind Ackman's billion-dollar-plus short trade in question.

Still, while Herbalife presented a strong defense of its business, and in particular, Ackman's allegation that a majority of the company's sales don't involve bona fide retail sales, the company's presentation isn't likely to be a knockout blow.

In the background, on Wednesday an 8.24% stake disclosed by Dan Loeb-run Third Point puts two of Wall Street's most vocal hedge fund investors pitted against each over the Herbalife's shares and business model.

After an over two hour presentation by the company and a subsequent CNBC interview with chief executive Michael O. Johnson, Herbalife shares closed down 1.8% at $39.24 Thursday trading.

Highlights of Herbalife's presentation included a strong rebuttal to Ackman's assertions of a pyramid scheme by company president Desmond Walsh and chief financial officer John DeSimone.

Notably, both Walsh and DeSimone questioned Ackman's most damning allegations - that the bulk of the company's earnings come from signing up new distributors and not actual retail demand. "Zero fee is paid for recruiting," said DeSimone, of the difference between bona fide retail sales and what Ackman characterized as recruiting bonuses.

CFO DeSimone reiterated Herbalife's fourth quarter earnings forecast, and even hinted they could exceed estimates. According to Bloomberg data that compiles analyst estimates, Herbalife is expected to report $1 in earnings per share on revenue of $1 billion and net income of $113 million, in the fourth quarter. The data also shows Herbalife has beaten analyst estimates eight of the last eight quarters.

Walsh, Herbalife's president, also provided data that cut against a crucial Ackman allegation that a new distributor in Herbalife's chain has little chance making any money selling the company's products. Data presented by Walsh showed that at Herbalife's top rungs - its Presidents club - roughly half of distributors earn more than someone higher on the company's direct selling chain.

Separately, Lieberman Research, an independent research hired by Herbalife, said a study it conducted of over two thousand distributors showed 73% joined Herbalife to be discount retail customers.

That data undercuts Ackman's claim that the vast majority of the company's sales originate from simply signing up new distributors - his definition of Herbalife's alleged pyramid scheme.

Ackman responded strongly to the presentation, claiming Herbalife left many of his points unaddressed.

"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% of distributors that have zero gross earnings," Ackman said in a statement that indicates Pershing Square will publiclty respond in detail to Thursday's investor meeting.

An investor question and answer session allowed by Herbalife following its presentation indicated that while some major investors and analysts were impressed by the company's rebuttal to Ackman's allegations, they were also hoping for a knockout blow, which might not have come on Thursday.

Barclays analyst Brian Wang applauded Herbalife's presentation in the investor question and answer session, but pressed Herbalife CEO Johnson as to whether the timing of Ackman's allegations might create a self-fulfilling prophecy of distributor withdrawals that could undercut the company's business model.

Meanwhile a portfolio manager at Columbia Management, an investment manager that owns 332,297 Herbalife shares, according to Bloomberg data, pressed Johnson on why the company wasn't fighting harder against Ackman's assertions.

The portfolio manager noted that while Herbalife characterized many of Ackman's points as "myths" and "misleading," the company didn't make more convincing claims of "libel" and intentionally misleading investors.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
HLF $43.17 0.00%
AAPL $123.25 0.00%
FB $83.30 0.00%
GOOG $548.34 0.00%
TSLA $185.00 0.00%


DOW 17,712.66 +34.43 0.19%
S&P 500 2,061.02 +4.87 0.24%
NASDAQ 4,891.2190 +27.8570 0.57%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs