Herbalife (NYSE:HLF) released its 10Q today after the market closed. Notwithstanding the prediction by D.A. Davidson analyst Tim Ramey that audited financial results would be released by now, none were forthcoming. It will be interesting to hear what the company has to say about this on the conference call tomorrow. I suppose the party line will remain "by the end of the year". Mr. Icahn must be thrilled by this delay.
Still, there were some interesting data points that emerged from the release.
Total distributors increased QOQ from 3.4 million to 3.6 million. The company recruited 570,000 new members implying that 370,000 Members resigned during the quarter.
Notwithstanding the growth in the total number of distributors, topline Sales growth and Operating Income growth was 0% QOQ. Additionally, the company's guidance for Q4 implies that Q4 will also be sequentially flat give or take 1%.
Considering the flattening shape of the company's sequential results, it is curious the company is guiding the street for revenue growth in 2014. It strikes me that this assumption is simply a guess at best.
YTD 1,160,000 distributors have resigned from Herbalife. By the end of Q4 this number will be over 1.5 million I am sure.
Q. Is the poor sequential data evidence of saturation in pyramid-scheme speak?
You be the judge.
This quarter also marks the first quarter that the company has used the term "Members" in its 10Q. Perhaps we will hear additional color commentary on this initiative on the conference call tomorrow. In the interim, the company's disclosure seems to add-up to more nomenclature nonsense. From the 10Q the company writes:
The Company is in the process of changing its terminology to identify "distributors" as "members", and those members who participate in the business opportunity our network marketing program presents, as "sales leaders".
We see the first evidence of this nomenclature application in the company's Regional Metrics disclosure. Ostensibly, this change seems to be much ado about nothing.
Recall, the company wants investors to believe that distributors with no downline have no designs on the business opportunity and are only "Members" so they can buy product at a discount.
Now we are told that the folks who are really pursuing the business opportunity are the Sales Leaders. If I am understanding the company correctly, this nomenclature shift strikes me as a direct shift into the oncoming headlights of a pyramid scheme prosecution.
Herbalife recruiters tell prospects that they can make retail profits reselling F-1 shakes at a mark-up. Now, as a result of this nomenclature initiative, the company seems to be conceding the point that the market clearing price for F-1 shakes is 25% off SRP or less. Want a discount on our product? No problem, just sign-up as a member.
But what of the poor soldier who actually wants to try to be successful as a retailer? Isn't the company now admitting too that the only way you can become a successful retailer is if you are a Supervisor?
And isn't the only way that a new recruit can become a SUPERVISOR is if they inventory load?
And doesn't this mean that there is no retail profit to be had if you are just a "Member" level participant?
The other question I have for the company is as follows. What of all of the videos and presentations and diagrams and promises that you make in your recruiting materials and marketing plan that state to distributors that "retail profits" are realizable if you are a lowly distributor or Success Builder? Doesn't your new Nomenclature initiative render all of these claims patently absurd in the wake of this change?
Isn't it now terribly obvious that nobody is paying full SRP for F-1 when all one has to do to save on their consumption tab is to sign your distributor agreement or alternatively buy online from a website?
Curiously absent too from the company's 10Q is the following data.
- How much product did your "Members" buy?
- How much product did your "Sales Leaders" buy?
Wouldn't that kind of data seem important to investors?
If you are now going to bother to segment your salesforce into "Members" and "Sales Leaders" shouldn't we get to find out just how each one of these customer segments performs as investors?
Or is there something else afoot?
As of this evening we have no evidence whatsoever that Herbalife's nomenclature initiative has any teeth to it whatsoever. What's the phrase? You can put lipstick on a pig but it's still a pig.
Changing the name of Junior distributors who clearly sign-up to be participants in the Herbalife Marketing plan is analogous to putting lipstick on a pig. No More. No Less.
More nonsense from a perpetually opaque enterprise.
Additionally, here we sit almost a year after Mr. Ackman's pyramid scheme allegation and still we have no direct evidence from the company whatsoever that legitimate retail sales are consummated.
But how is this for the theatre of the absurd? In the company's press release today it revealed that it has spent $21 million YTD to defend itself against Pershing Square's allegation.
Let me restate that:
The company has spent $21 million YTD defending itself against Mr. Ackman's allegations.
Now, I will be the first to admit that I am not the only person capable of using an abacus, but isn't it sort of obvious to ask:
Wouldn't it be less expensive to implement a management reporting system to track retail sales than it is to:
- hire lawyers
- hire PR firms
- hire lobbyists
- hire Market research firms
- buy gravitas
- and generally waste your management time and energy chasing your tail around like a dog for the past 9 months?
Or is it me that is missing something obvious?
To close, Herbalife's 10Q does little to dispel the allegation that this company is a pyramid scheme. Rather, what investors continue to be left with is perpetual uncertainty. As of this evening investors still don't know the answers to the following questions:
- Will the audit require restatements or not?
- Will the oral arguments due in the Belgian Court on November 4, 2013 in Brussels lead to a pyramid scheme conviction or not?
- Will the Bostick case that is proceeding to trial lead to the discovery of critical evidence that will confirm Herbalife is a pyramid scheme?
- Will Mr. Icahn remain in a headlock until February if the stock fails to trade into the $70s or higher than 14x this year's eps.
- Will the SEC reveal the results of its inquiry that it launched back in January of this year?
- Will the company continue to churn out ex-distributors as a matter of routine?
- Will the evidence of slowing growth in the company's top-line perpetuate?
- How much retail profit does the marketing plan generate for participants?
To close. The shortest distance between Point A and Point B is a straight line.
Why we need more nomenclature nonsense instead is befuddling at best, especially if you are long Herbalife common equity.
Warning: The recruitment of the Surgeon General informs us that investing in Herbalife may be hazardous to your health.
Disclosure: I am short HLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.