Herbalife’s stock collapse could signal tough times ahead for industry
Herbalife, the world’s largest network marketing company devoted solely to the sale of nutritional products, has served as something of a bellwether for the entire industry. It had been riding a string of strong sales gains in recent years. Herbalife has consistently ranked No. 3 on the list of the world’s biggest MLMs maintained by the industry publication Direct Selling News. Herbalife’s annual revenue climbed from $4.47 billion in 2015 to $5.8 billion last year.
Along the way, Herbalife weathered storms such as the collapse of the Venezuelan economy, which was once a significant market for the company. It also seemed to have roared through the supply chain issues early in the pandemic to profit from the strong increases in demand for many dietary supplements.
Inflation finally taking big bite
But the combined issues of supply and transportation difficulties along with rising raw material costs due to inflation finally seem to be affecting the company’s momentum, much as a pride of lions latching onto an elephant might eventually drag it down.
In the most recent earnings release, Herbalife reported first quarter net sales of $1.3 billion, down 11% from a year previously. The company revised is projections in light of the weak beginning of the fiscal year. The company now expects second quarter sales to decline by between -17% to -11%. Full year guidance is not quite as bleak, being projected at -4% to -11%.
As a result, Herbalife’s stock price has collapsed since the beginning of the year. Herbalife’s shares hit a 52-week high of $54.24 in mid September 2021. The stock hit a low of $20.48 last week before rebounding slightly. The stock’s all time high of more than $60 came in 2019 (Herbalife went through a 2-for-1 stock split a number of years ago).
Fighting inflation
On Wednesday, the US Federal Reserve System increased its benchmark interest rate by 0.75%. That’s the biggest increase since 1994. That followed a 0.5% increase in February. The Fed's goal is apply just enough brakes to the economy to get inflation, which topped 8% in May as measured by consumer prices, down to about 5% by the end of the year, while trying to avoid significant layoffs. The danger is that the Fed will overshoot and spark a recession.
In the meantime, inflation will remain high and supplement manufacturers will in many cases be forced to pass higher costs onto consumers. As supplements are a discretionary purchase for most households, it remains to be seen whether they’ll still use as many supplements when they’re being squeezed between higher food and fuel prices and steeply rising rents.
