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Herbalife (HLF) investors received more color this week as the company disclosed its 10k and held its year end conference call. The call transcript included a rather bizarre ad hominem attack against Mr. Bill Ackman of Pershing Square. More on that later.

But first.

Herbalife opened 2013 fiscal year with 3.2 million distributors.

According to the company's regional key metrics disclosure:

  • 2,166,695 new distributors were recruited in 2013.

Herbalife ended the year with 3.7 million distributors. Solving for X:

  • 1.6 million people resigned globally from the Herbalife Pyramid Scheme in 2013

This data point is important to consider against the following assertion from Herbalife's CEO Michael Johnson: Bill Ackman is a "Wall Street Gambler" who has made a "reckless" $1 billion bet against Herbalife common.

Full disclosure, I am not a huge fan of the Herbalife cadre of executives. Specifically, I think their entire business plan relies upon immorality and deception for its success. Or, if you prefer, the CEO is the "Chief Charlatan" at the tiller of a destructive global pyramid scheme that routinely victimizes low-income individuals with a rigged confidence game.

I suppose if I were running my own PR firm this might be the kind of ad hominem language I would use to attack Mr. Johnson's credibility in the same way Mr. Johnson attacked Mr. Ackman on the HLF conference call.

Make no mistake as an investor. Mr. Johnson's verbal tirade against Mr. Ackman was not arbitrary. On the contrary, Herbalife in all likelihood has hired a very expensive PR firm to wage war against Mr. Ackman's credibility. The choice of words is both deliberate and designed.

"Wall Street Gambler" attempts to tap-in to the antipathy many Americans feel towards Wall St. investors and their ruthless approach to profiteering. Also, the term attempts to brush-off entirely the mountain of due diligence conducted by Mr. Ackman and his team at Pershing Square. Also, every time we see Herbalife comment publicly on the Pershing Square investment the phrase "reckless $billion bet" is used ad nauseam. This, of course, is intended to try to agitate Pershing Square investors and also discredit Mr. Ackman directly in an effort to shake the tree so to speak as it applies to Mr. Ackman's reputation.

Here's the problem if you are a Herbalife long. The PR strategy isn't working.

If anything, I would argue that Herbalife should fire its PR firm entirely and proceed with a totally different approach. Instead of looking strong on the Herbalife conference call Mr. Johnson ended-up looking weak and insecure. Mr. Johnson's anger also is totally and utterly misplaced if you are a Herbalife long and here is why.

If you are a believer in the Herbalife long thesis then Mr. Ackman is not your mortal enemy. On the contrary, he is your best friend. In fact, he is the best friend you have ever seen in your life. Mr. Ackman's bear raid has opened the doors to the single-most delicious and tantalizing opportunity one could imagine. Mr. Ackman's bear raid has temporarily suppressed the value of HLF common into territory far below its intrinsic value. This, of course, opens-up the opportunity for the company to use its balance sheet and swelling company coffers to retire millions upon millions of shares of stock.

Q. If you were the intelligent CEO of a publicly traded company, why on earth would you want to interfere with that dynamic?

In practice, wouldn't you want to do the opposite?

Wouldn't the correct PR move be as follows:

Our company has been targeted by a short seller. It is our view that this short seller is misinformed. However, we are delighted to be able to take advantage of this opportunity to retire our shares at accretive valuations. In time, we expect the cloud of adversity around our company to be lifted. In the interim, true HLF investors will be rewarded for their patience as our company aggressively recapitalizes itself during this period of irrational uncertainty.

or how about this for an idea?

Herbalife has been targeted by a short seller who argues that our company does not make sales to "ultimate users". Over the next 12 months it is our plan to put into place a management reporting system to both capture and report actual retail sales to participants outside of the Herbalife salesforce so that we can summarily refute this baseless accusation.

If you were not the CEO of a global pyramid scheme, wouldn't these kinds of responses seem most rational? Wouldn't this kind of calm and cool indifference to the allegation show strength while wasting your breathe ranting and raving about the evil persona of your nemesis show weakness?

What does common sense tell you?

One thing we know for sure from the Herbalife conference call. Herbalife and its band of merry men spent close to $30 million on professional fees "defending itself" against Mr. Ackman's allegations. This doesn't even include the amount spent on the reaudit.

Doesn't this strike you as sheer lunacy in action?

Isn't the shortest distance between two points a straight line?

Instead of spending $29 million on stuff and nonsense including lawyers, investment banks, PR firms, etc. Isn't the obvious antidote to Mr. Ackman's crusade a proper database that tracks retail sales?

We also know that the company has implemented a number of new policies for its distributors as part of its "Build it Better" program (or as I like to call it "Build it Better for Me"). Distributors now have to take training courses, retrain every year, acknowledge disclosures, etc.

Q. Instead of adding all of these additional layers of bureaucracy to the company why doesn't the company simply mandate that all distributors must report all retail sales receipt to the mothership?

or

Why doesn't the company simply change its wholesale pricing so that all distributors pay the same cost of goods or product?

Or is something else going on entirely?

Notwithstanding all of the good news advanced by Herbalife's management equity investors don't seem to care. This has to frustrate Mr. Icahn and Mr. Stiritz too. Other long investors aren't sticking around to find out what happens next. Soros, Bass, and Druckenmiller hit the bid and head for the exits. Can Mr. Icahn be far behind?

The valuation is capped at around 10-11x forward guidance even as the company reveals it will be in the market buying shares aggressively over the next few months.

What is Mr. Market seeing that Mr. Johnson is not?

Perhaps the answer is obvious? Perhaps Mr. Ackman is actually on to something? Perhaps the fact base advanced and disclosed by the research team at Pershing Square is gaining gravitas?

Perhaps Mr. Johnson's game of "wag the dog" carefully crafted by his PR firm simply isn't working. Perhaps the data doesn't lie?

Herbalife torched another 1.6 million people with its confidence game last year alone. Still, the company's recruiting juggernaut persists. Vietnam is next as Mexico slows. Is anything more ludicrous? Still, new recruits are indoctrinated into saturated markets with the promise that the Herbalife Business opportunity is "changing people's lives".

Shakespeare famously wrote in Hamlet "The lady doth protest too much, me thinks."

Are Mr. Johnson's deliberate and rather paranoid musings about Mr. Ackman achieving their desired effect? Or, does he simply come across as a tad desperate?

Perhaps only a proper retail tracking system might lend us the answer?

Investment thesis: Herbalife is a global pyramid scheme that should be investigated and shut down by regulators.

Longs who are hitting the bid right here as Herbalife "recklessly" retires stock with precious shareholder capital will ultimately be rewarded.

As for Herbalife's PR firm and whether or not they make Mr. Johnson look weak or strong?

My thoughts to the HLF Board of Directors would be simple - ask your CEO to rein it in and save your shareholders' money.

Nobody seems to be fooled.

Source: Herbalife CEO Doth Protest Too Much