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Summary

  • Herbalife's dividend suspension is strange..
  • Herbalife wants you to exclude expenses related to Bill Ackman but these are very real and perpetually ongoing expenses and related to its marketing..
  • Herbalife also wants you to exclude expenses related to the FTC investigation, but these are again very real expenses that could be ongoing for years..

Herbalife (NYSE:HLF) just reported its first quarter numbers. Revenue beat analyst estimates, earnings per share beat analyst estimates, the company raised its guidance, and it is increasing its stock buybacks. Hurray! Not so fast. How it goes about all of this raises more than an eyebrow.

First, Herbalife has terminated its dividend and instead plans to increase its buybacks. Nothing wrong with that unless you are a dividend investor who was depending on that dividend for income. It just seems odd that it wouldn't want to do both a dividend and a stock buyback to show the street confidence. In the first entire quarter it only spent $30.4 million on its dividend compared to $255 million for the single month of April alone in stock buybacks. Was the nearly 9 to 1 ratio of buybacks to dividend not enough? Still, not a big deal as the dividend yield wasn't that big anyway.

Next, Herbalife's guidance excludes "the impact of expenses (primarily for legal and advisory services) relating to the company's response to information put into the marketplace by a short seller." That short seller is, of course, Bill Ackman. The fact that the company is spending so much money on publicity to counter somebody's opinion, instead of just proving him wrong with retail sales logs, is a bit odd. Since apparently this cost is so high that it has a material effect on the results to the point where the company wants to separate it out, isn't this a real expense for the operations and a real cost of doing business and generating revenue? If it's not, why bother fighting Ackman and wasting shareholder money? If it is vital to the business operations, then it is a very real expense. Companies like Herbalife, legitimate or not, legal or not, are always going to have their critics. Should McDonald's not count its marketing response to Taco Bell's breakfast launch in its guidance? Of course it should count it all.

Finally, Herbalife's guidance excludes "expenses related to a FTC inquiry." Again, these are important expenses that may be ongoing for years and are vital to sustaining Herbalife's business operations, revenue creation, and profitability. They are very real expenses that involve real cash and are ongoing. They are a cost of doing business, and Herbalife shouldn't exclude them and neither should investors.

I won't pretend to know exactly how much these ongoing "one-time" costs will be, but I don't think investors should take Herbalife's guidance or even "adjusted" earnings numbers seriously. Ackman for example said he will be shorting Herbalife to the end of the Earth so how can the company exclude its never-ending responses expenses from its numbers? And what method does it even use? When it spends money on marketing presentations in response, is the company not also marketing itself to generate new distributors and sell more products at the same time? Does the company now expect investors to exclude entirely these marketing expenses just because Ackman is the focus?

Maybe if Herbalife wants to break away numbers, it should focus on breaking away its retail sales numbers to ultimate end users so that it can prove itself legitimate. Then maybe it wouldn't have to worry about Ackman, other short sellers, or the FTC.

Source: Herbalife's Misleading And Bizarre Guidance, Don't Fall For It