In 2016 Herbalife agreed to pay a $200 million fine levied by FTC to put to rest allegations that its business model constituted an illegal pyramid scheme. A big part of the agreement was a restructuring of how the company accounted for sales and rewarded its independent distributors. In order to stay out of pyramid scheme territory, the compensation structure had to be revised to place the emphasis on sales to end users, and to downplay how much distributors were rewarded simply for signing up additional new distributors. Herbalife is the world’s largest network marketing company devoted solely to the sales of nutritional products.
Restructuring drag finally abating
The restructuring, which was implemented in 2017, caused a significant drop in overall sales numbers reported by the company. But CEO Rich Goudis said the results from the US market—which is still the company’s biggest even though sales in China and elsewhere continue to expand as a percentage of overall sales—is illustrative of the turnaround.
“The US business was down 19% in the second quarter, the quarter when we implemented the final changes required by the FTC order. The US business was down 17% in the third quarter and down just 8% in the fourth quarter and now even less in January. This is what happens when you have a business based on consumer demand and daily consumption and strong leaders who innovate and inspire their teams to persevere through transitions in their businesses,” Goudis said in an earnings call with analysts. The call was posted in transcript form on the site seekingalpha.com.
Pace of innovation revives
Goudis said the pace of product innovation has revived, too, driven in part by a crowdfunding approach that opened the door more widely for suggestions from the company’s distributor base.
“We just completed our first global innovation challenge using crowdsourced technology and had more than 3,900 employees from 62 countries engaging and collaborating on ideas,” Goudis said. Goudis said more than 70 new products were launched in the fourth quarter, including demographic-specific multivitamins in Russia and elsewhere in the EMEA markets, a new immune health ingredient featuring Embria’s EpiCor ingredient delivered in stick packs that was launched in Mexico that will soon be available in North America, the first functional food snack offering in China and a heart health product line launched in India.
China strategy
Goudis said Herbalife has received more than $90 million in matching grants from Chinese authorities to further build out its operations within the country. Goudis said the funds are in part meant to help find ways to combat the country’s growing obesity trend. Proportionately speaking, far fewer Chinese are obese than is the case for countries like the US and Mexico, but the trend is up, and is rising mostly sharply among younger people and urban dwellers.
“This China Growth and Impact Investment Fund will focus on 5 key areas, new acquisitions in health and wellness products in companies, expansion of nutrition clubs, increasing and improving technology, providing additional research, learning and training in the areas of nutrition, and public private partnerships focused on eradicating obesity,” Goudis said.
Earnings details
Herbalife reported net fourth quarter sales of $1.1 billion, which represented an increase of 4.6% on a reported basis and an increase of 3.4% on a constant currency basis compared to the fourth quarter of 2016. Full year 2017 worldwide net sales of $4.4 billion represented the decline of 1.4% and 1.1% on a reported and constant currency basis respectively. Volume points, which is measurement of the amount of product moved before discounts, for the fourth quarter 2017 were $1.3 billion, which represented a decrease of 1.8% compared to the fourth quarter of 2016 and was in line the company’s expectations.