The fate of Herbalife (HLF), whose logo graced David Beckham's LA Galaxy uniform shirt the last few years, has become an object of intense interest to Seeking Alpha analysts since Bill Ackman called it a pyramid squeeze and shorted its shares.
Shortzilla has been all over alleged wrongdoing by Herbalife's CEO. Rich Rezny has offered a detailed analysis of short-seller Bill Ackman's claims, which he says will soon render the stock worthless. (It still had a market cap of $2.81 billion as this article was written.) On the other side, Deja Vu says that even if Herbalife is a "pyramid scheme," as Ackman alleges, it's a sustainable one.
What no one seems to be asking is whether this is a one-off or a trend.
Are there other companies using a similar system to Herbalife? Commissioning salesmen and having others get an override on those commissions is an old sales technique, one that I engaged in during my college years -- unsuccessfully. Avon Products (AVP) also does direct selling. The vast majority of the the Direct Selling Association's members, like Cutco and Mary Kay, remain private.
Surprisingly, Amway, the dominant player in the space, keeps its Malaysian unit public under the ticker symbol M. An analysis by blogger Alex Lu last year showed it bringing more than 10% of sales to the bottom line, but the numbers were all in Malaysian ringgit, which usually trade at about three to the dollar. The company is still listed, according to the exchange, trading most recently at 11.4 ringgit, or about $3.70, per share. Annual sales were running about $270 million/year. That's just in Malaysia, but it gives you a flavor for the company.
There are some other direct sellers listed on American exchanges, like NuSkin (NUS), which offers beauty products, and Primerica (PRI), an investment company now run out of Duluth, Ga. The largest number are involved in selling health, beauty, nutrition, and other relatively low-priced products that are a considered sale, either because of extravagant claims or the commitment they take from customers.
NuSkin has been growing steadily over the last few years, earning an increasing margin on sales that topped $1.5 billion its last fiscal year. Primerica has been winding down, having cut its sales rate by half to just over $1 billion last year, but taking over 15% of that to the bottom line. Avon has been a much more marginal business, having stalled out at the $11 billion level and net income well under 10% of that.
Direct selling, as an industry, has been squeezed steadily by the Internet and by customer suspicion, which over time overcomes the personal relationships the industry depends on. To maintain momentum, it has become an increasingly international business.
Even if there are other Herbalife-type situations in the industry, most will be dealt with out of public view. But are there other industries where short-sellers could seek profits from dubious financial claims? Let's start that search in the comments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.