Herbalife has been under intense pressure from activist investor William Ackman, who has taken a short position in the company valued at $1 billion. After making the bet, Ackman embarked on an unprecedented public campaign to discredit the company, calling it a pyramid scheme that was teetering on the edge of collapse. While the market up to now have disregarded Ackman’s view, his pressure tactics seem to have struck a nerve with regulators. The Federal Trade Commission reportedly has an investigation ongoing into aspects of the company’s business.
Ackman’s strategy may finally be gaining some traction in the market itself. Shares of Herbalife declined by 20% in early trading Tuesday and closed at $44.26 after the earnings release after market close on Monday. Shares were in down an additional 4.5% in early trading on Wednesday, sitting at $42.28 after almost three hours. The company’s share price is down almost 50% from its 52-week high of $81.81. It was the second quarter in a row that the company missed analysts' expectations.
Of particular concern for traders was the revision in the company’s long term outlook. The company revised its outlook downward, saying it expected earnings per share to come in the $5.45 to $5.75 per share range, or about the same as the previous year. But in the interim the company has embarked on an aggressive share buy back program, so with the smaller number of shares on the market, that forecast actually represents an earnings outlook that is lower by as much as 30%, analysts say.
Long term outlook strong, CEO says
CEO Michael Johnson, in an earnings call with analysts, sought to pour oil on troubled waters. He reminded analysts that Herbalife has a 34-year history selling dietary supplements and nutritional shakes via its network marketing model and is poised to take advantage of long-term global demographic trends.
“Government and societies around the world continue to contend with the financial and human impact of climbing obesity rates, aging populations, and the post 2008 economic reality. There is no doubt that Herbalife is part of that solution,” Johnson said.
Johnson said changes Herbalife has made to its business model have served to moderate short term growth, though he said they will make a stronger company in the long run. Chief among these changes is a is longer path for new distributors to enter the higher compensation realms, which Johnson said makes for better retention and better prospects for long-term success.
Class action lawsuit
In a related development, on Friday Bloomberg reported that Herbalife settled a class action lawsuit brought by a former distributor who alleged the company was operating an illegal pyramid scheme. Herbalife agreed to pay $15 million to a class headed by Dana Bostick, a California housing inspector who tried to earn extra income selling the company’s products. Herbalife denied the pyramid scheme claim, but decided a settlement was the most expeditious solution.
In a statement issued Friday the company said it “has been aggressively defending itself against the plaintiffs' allegations set forth in Bostick v. Herbalife ever since the lawsuit was filed in 2013. Yet, the potential cost, as well as the distraction, disruption and burden of prolonged litigation on the company and its management team, led the company to decide that the terms set forth in the settlement agreement provided the best path for moving forward.”
Earnings details
Herbalife reported net sales in the quarter of $1.26 billion, an increase year-over-year of $125.1 million or 3.5%. Analysts had expected the company to earn $1.31 billion. The earnings came in at $1.45 per share which was was $0.04 higher than the adjusted third quarter result of the previous year but was $0.04 below the low end of the company’s guidance. Wall Street expectations were set at $1.51 earnings per share.