I enjoyed reading Matt Stewart's "Letter to John Hempton" yesterday, as he seemed to systematically dismantle some of the points that Hempton is perpetually missing about Herbalife (HLF). If you read Stewart's article you, once again, are privy to the fact that shorts seem to have a much better grasp on Herbalife's business model than both longs and Herbalife distributors themselves. Hempton, a fund manager with a blog called Bronte Capital has weighed in on the bullish side of the Herbalife trade by basically claiming that's he's seen people using Herbalife's products in gyms and has spoken to people whose "lives Herbalife has saved."
So, he's basing his investment on some Yelp (NYSE:YELP) reviews, basically.
That might not be the mountain of evidence that the company is going to need to deflect the FTC, but I digress.
It reminded me of a another website that I read years ago.
Alright, I mean that in jest, but it was actually the first thing to come to mind.
I was getting a couple of feelings, as I read through his site a few times last night. The first was, "I really hope this guy isn't managing a massive amount of money". The second was simply that Mr. Hempton was just missing the point - as I believe Mr. Icahn is. This isn't about whether or not Herbalife makes a product, whether the product works, or whether or not people at the gym use it. All of these are likely true, many times over. That, however, doesn't explain or justify the means in which Herbalife does its business and its underlying business model. It doesn't take into account the inventory loading that distributors are forced to do if they want to make money from downline recruits - where the real money is.
Of the original allegations made by Mr. Ackman, the only response Herbalife has made has been modifying its return policy. This, certainly a gesture in the right direction, isn't nearly enough at a fundamental level to implement any changes that would show a trend. It was literally, the least they could do.
Thus, I continue to believe that Herbalife is operating a pyramid scheme.
Let's look at what else has developed of significance over the last two days with regards to Herbalife. Yesterday, buzz was abound as Herbalife released its own new website, iamherbalife.com - yet another layer to the public relations paint job tossed over the Herbalife business model. Hopefully, the FTC has some thick chisels.
Herbalife's PR stated:
Herbalife (NYSE: HLF) unveiled a new website today designed to highlight, in their own words, the positive impact Herbalife has had on the lives of the company's members and customers. The site also addresses misperceptions that have been put into the market about its business model.
The website, iamherbalife.com, chronicles hundreds of real life stories of people from across the United States whose lives have been improved through Herbalife's products or the opportunity for financial empowerment. The website also features detailed information about Herbalife's industry-leading customer protections, including its "Gold Standard" guarantees:
-- Clear, accurate and timely disclosures to prospective members regarding potential income-generating opportunities;
-- No minimum purchases and low entrance cost;
-- Fully-refundable 90-day money back guarantee for the entrance cost if membership is resigned for any reason;
-- 100% refund guarantee plus shipping costs for return of all unsold product purchased in prior 12 months upon termination of membership; and
-- Written acknowledgement of these 100% money back guarantees.
IamHerbalife.com encourages visitors to learn about the real Herbalife through videos, member testimonials and customer feedback. It also shines a light on the truth behind the allegations made by Pershing Square and the extraordinary lengths they have gone to in order to achieve their goal of driving down Herbalife's stock price for financial gain.
The beauty of this site is that it was likely started long before the FTC investigation was initiated. Now, it doesn't matter what PR Herbalife throws against the wall - the only thing that's going to stick is going to be the action that the FTC takes. Again, with the chisel.
The website is simple. Nice colors, friendly looking, simple.
The website includes testimonials of over 600 distributors.
Anyone else notice these gems at the bottom of specific testimonials?
Best testimonial wins! Even defending themselves from allegations of duping their distributors, they're still duping their distributors!
Alright, alright - let's even, for the sake of benefit of the doubt, assume these are all legitimate testimonials from these people - they found value in the product and have made some money and in no way were goaded, convinced or duped into making these testimonials.
And, for the purposes of this discussion, let's make it an even 1,000.
The bottom of Herbalife's pyramid has about 3 million people churning in it over and over, so this constituency of testimonials (most a couple of sentences and a few before/after pictures), represent less than ...
... of all Herbalife distributors. There's no doubt that thousands of people are getting rich with Herbalife - but what about the other pesky 3 million?
And, look, I even made it look simple and no-BS looking!
At first, the website seems to make things simple to the casual observer. Look at these three questions, for instance.
(click to enlarge - source of all images iamherbalife.com)Click to enlarge
Finally, we can get some no nonsense answers!
And how about this question that, in the balance, hangs billions of dollars in market cap, an entire company, and both Bill Ackman and Carl Icahn's reputation:
Mmm, that's some good ole' fashioned muck polishing!
That's a whole lot of obfuscation around the facts. Here again, is what the site should really say:
Whether it's 50% or 70% go to retail depend on the source you ask. I'm using the prior to be conservative, and because it's likely that it's a metric Herbalife likely still can't hit. The statement at question is whether recruits are the "primary" source of income for both the company and its distributors. Herbalife has a 70% rule in effect for this, but they don't enforce it - at all.
Further, Herbalife takes another stab at the pesky question of how many people are signing up to be distributors for personal consumption, by producing this gem of an answer:
Oh, I'd love to see the audited math behind coming up with that number. And, also, the pretzel of names and nomenclature likely twisted to be able to word it like they have. We can now add "73%" to the list of different answers we've gotten to this question over the last couple of years.
But, let's change gears and focus on Icahn's interview on CNBC a couple of days ago. In between the "uhhhs", Icahn managed to belch out a couple of points updating the world on both his grasp of the Herbalife business model, and how he's going to proceed.
If you want to read my entire analysis of Icahn's interview on CNBC a couple of days ago - and why it's very telling that Icahn might be backing off of Herbalife a bit - you can click here to read it.
One item that I failed to pick up on, that CNBC's Herb Greenberg nailed, was yet another statement that Icahn made.
Distributors get paid to bring in other distributors. But, I think that has been cleaned up dramatically in the last few years.
-Carl Icahn, CNBC Interview, source link above
And, as Herb responded: what has been cleaned up? Why did something have to be cleaned up? How do we know it's been fully cleaned up?
As Greenberg further said - you're the company's biggest shareholder - how do you not know the entire business model like the back of your hand? Further proof that Mr. Icahn simply failed to do his due diligence?
Further, Icahn said that when he goes on the board of companies, they have a track record of success. Which immediately reminded me of yet another pesky headline.
And look at this ridiculous statement made by Icahn in the very same article:
"Additionally," he said in his statement, "I should also like to say that my wife and I are good customers of Blockbuster and would like to commend the friendly attitude and efficient manner of the rank-and-file employees."
"Rank and file employees!" What a lovely thing to say.
So, with Blockbuster, Icahn wasn't just on the board, he was a customer. I wonder if he's signing up for his chance to be an Herbalife distributor as we speak?
Finally, the Xena-like warrior princess behind the Herbalife story, Michelle Celarier at the NY Post - who has done a great job covering the ins and outs of the Herbalife fiasco from the get go, dropped a couple of big pieces of information via Twitter yesterday. In addition to linking to her latest piece, she said that Ackman's letters scared the departing board members at Herbalife.
Why? What is there to be scared of?
She additionally points out that it appears that Bill Stiritz has no interest in being on the board.
Why not, Bill?
As Matt Stewart said in his article out just this morning, Herbalife is swimming towards an Amway, but is still far from sandy shores.
I contend that when the FTC uncovers information about how Herbalife has been conducting its business it will likely shut the company down in the U.S. If the FTC doesn't shut the company down, they will impose sanctions that will likely prevent Herbalife from the type of growth they've had in the past - it'll either be slowly or quickly, but in my opinion, Herbalife only has one way to go for the long-term, and that's downward.
Take caution, and best of luck to all investors.
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.