Activist investor Bill Ackman continues to find himself in a deep losing position on his famous short of Herbalife, the maker of nutritional products and shakes, which Ackman argues are being sold via an illegal pyramid scheme.
Ackman famously bet against the company last year, but a number of high profile investors have taken the long side against him, and in the absence of any regulatory action against the company, Herbalife remains quite profitable. Hence the losing trade.
In a new letter to investors (which we found on Scribd) Ackman goes through what he says are signs that the company’s fundamentals are deteriorating.
Among the signs: The reported suicide of a top Herbalife salesman.
Here’s Ackman with the big picture on how this fits into Herbalife’s business situation:
The Company continues to suffer the departure of top distributors. In early January, a long-time President‟s Team member, Anthony Powell, left for a competing multi-level marketer (MLM) called Vemma that markets “science-based‟ energy drinks to college students and young adults. On June 22nd, the New York Post reported that one of Herbalife’s top distributors, Shawn Dahl, a so-called Chairman‟s Club member, had left the Company to pursue an alternative MLM opportunity called Nutrie, also selling weight-loss and “health related‟ drinks.
Dahl‟s departure is particularly notable given that, as recently as April 30th on the first quarter earnings call, Herbalife management claimed that there was no merit to the rumours that certain Chairman‟s Club members might be planning their departure, asserting that “our Chairman’s Club members are committed to the business, committed to working with their organisations [and committed to a] stronger Herbalife.” Last week, John Peterson, one of the top few distributors in the Herbalife system — a so-called Founders Circle member who became a distributor in 1983 — reportedly committed suicide.
The stock declined 4.1% on the news potentially because of the impact on other distributors’ confidence from his death and what it may suggest about top distributor business prospects going forward. In 2000, Herbalife nearly collapsed when the Company‟s founder Mark Hughes died from an overdose of anti-depressants and alcohol. The Company was then sold to private equity, and new management was installed to save the business.
The Company‟s U.S. web page listing its Chairman’s Club members has been down for several months — for “maintenance,‟ according to Herbalife;s President Des Walsh — raising questions as to whether there may be further changes in the Company‟s top distributor ranks. Despite Herbalife‟s above-expectations earnings per share growth this quarter, a careful analysis of Herbalife’s second quarter financials suggests that business fundamentals are beginning to deteriorate, as operating earnings, an important measure of the Company’s core economic performance, showed only a 3% increase, a dramatic decline in growth from previous quarters. We believe that Herbalife‟s business fundamentals have just begun to be negatively impacted by top distributor departures and various distributor rule changes.
Of course, ultimately Ackman’s goal with Herbalife is for regulators to come in and shut it down, and he says progress is being made on that front, though he can’t get into specifics:
Over the past eight months, we have made material progress in attracting Federal, State and international regulatory interest in Herbalife. We are not at liberty to disclose the nature of these developments, but we believe that the probability of timely aggressive regulatory intervention has increased materially. Furthermore, we have learned of serious product quality issues from former Herbalife employees, information that is in the process of being provided to regulators. Based on what we have learned from these whistleblowers and other sources, we believe that serious product quality and safety issues continue to exist at the Company.