Bill Ackman and his team of presenters recently wrapped up their talk about Herbalife (HLF), speaking for over three hours about the company, which Ackman called an “ingenious fraud.”
Bloomberg News Ackman reiterated his stance that Herbalife is a pyramid scheme, and discussed the results of his team’s extensive undercover research from the last two years. Ackman’s Pershing Square Capital sent people into Herbalife distributors' stores and clubs in the United States, Canada, China, and six other countries to investigate the company’s practices. He maintains that Herbalife sucks people into long and expensive training programs that violate labor laws, defraud participants and force-feed sales of the company's products.
He said the company has fictitious customers, meaning that Herbalife sales come primarily from the friends and family members of people going through the training program to become distributors of the Herbalife product. Ackman pointed to his research showing that trainees need to bring in a certain number of regular customers to their recruiters' stores in order to advance in the training and be able to sell the product themselves. He also charged that the company was running a fake university, referring to Herbalife’s “Success University,” which participants can pay to attend in hopes of moving up the Herbalife ladder. A Pershing Square Capital lawyer noted that institutions can’t call themselves universities without meeting specific criteria.
Herbalife defended its Success University and other training programs in a statement it issued after Ackman’s presentation, saying, “Our training approach – sometimes referred to as a "university" – is similar to the training model that has been deployed by numerous consumer-facing companies.”
Ackman thinks the bull case on the stock is that the FTC, which has opened an investigation into Herbalife, may slap the company with some fines and allow it to continue doing business. He argued that Herbalife doesn’t have fundamental demand for its product, citing the high prices for its shakes, which run at about $5, relative to the prices for similar shakes made by competitors. “If you really wanted the product, why wouldn’t you buy the branded version at 1/4 the price?” Ackman asked, referring to Unilever’s (UL) Slimfast. He said that Herbalife is heavily dependent on its nutrition clubs, which distributors can start after paying for training and receiving their certifications. A few years back, the company said these clubs accounted for 33% to 41% of volume. Ackman thinks that the number is a lot higher – perhaps over half the company's revenues — and thinks the clubs’ product sales are unprofitable for distributors….unless the distributor recruits others and perpetuates the "pyramid."
Herbalife maintained that its nutrition clubs were popular with distributors, citing an internal study that indicated that 87.5% of club operators are happy with their earnings and 92% want to continue with their nutrition clubs.
The company also cited findings from Walter H. A. Vandaele of Navigant Economics LLC, who investigated the company and concluded that its model was not consistent with an illegal pyramid-scheme model.
Near the end of his talk, Ackman listed the government agencies investigating Herbalife – the U.S. Securities and Exchange Commission, the Federal Trade Commission, the U.S. Department of Justice, among others – then chided those agencies for taking such a long time to act. While the government takes its time, said Ackman, Herbalife's victims have lost billions of dollars.
Choking up at the end of his presentation, Ackman acknowledged that he'd been fortunate enough to realize the American Dream. Then he called Herbalife CEO Michael Johnson "a predator" who defrauds poor folks who are seeking that dream themselves. The hedge fund manager vowed to go to the ends of the earth to convince people of what he believes the company is doing.
Investors appeared unconvinced. Herbalife stock gained 25% to $67.77 today.
Click to the next page for our live coverage of Ackman’s presentation.
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