Herbalife: Inability To Settle With FTC Means Guidance Should Be Withdrawn

| About: Herbalife Ltd. (HLF)

Summary

Fox Business News' Charlie Gasparino reports yesterday that Herbalife is so far unable to get a settlement done with the FTC. "Terms have not been reached," he stated.

Gasparino notes that HLF's offers for settlement have been rejected - QTR thinks this leak is PR spin so the company can blame the FTC when they're forced to litigate.

QTR continues to believe that Vemma-like reforms are likely what the FTC is asking for - devastating reforms that likely have HLF pinned between crippling the business and litigation.

The introduction of the asinine H.R. 5230 bill that was written about yesterday signals that the Direct Selling Association is looking for a "hail mary".

If this is so, and there are serious portions of the marketing/compensation plan on the table that could be severed from the business, Herbalife's guidance is extremely suspect.

Yesterday, Charlie Gasparino reported, in a bizarre one minute segment, that Herbalife (NYSE:HLF) has not come to terms with the Federal Trade Commission over a settlement yet. The hang up seems to be changes to the company's business model.

Gasparino has sources at or near the company, as he usually gets the scoop when the narrative is coming from the long side of the Herbalife argument.

He makes the point that a settlement hasn't been reached, and then makes the bizarre editiorialization that "for all I know it's going to be done tomorrow". Let's look at exactly what he said yesterday:

What we understand is this, and I'm gonna do it real quick and we'll get into the rest of the show. Sources are telling the Fox Business Network that they continue to haggle with the SEC - with the FTC - which is investigating them over their business model, over the terms of their settlement.

They have agreed to pay a fine, they have agreed to make some changes to their business model - but still - they thought they would get this thing done by now. They're still haggling.

Listen, I can't tell you it's not going to happen. I think an F - I think dollars to donuts - the settlement happens.

(Clueless Liz Claman: The stock - it's gotta go up at that point)

But if you look, [the stock] is going down because most people think this thing would end, and it's not ending. They're still haggling over the terms. So, for all I know it's going to be done tomorrow, but from what I understand as of late yesterday, terms have not been reached even though Herbalife has put up numbers of a big fine and some changes to the business model.

Well, Charlie, today is tomorrow. Has a settlement gotten done?

This narrative out yesterday strongly counteracts the way Herbalife disclosures were made over the course of the last two quarters, seemingly written as if to give the public hope that a settlement was the likely scenario.

Here's how the "settlement" narrative has de-volved over the last four months. You tell me if it looks like things are going well:

Click to enlarge

QTR's Magic 8 ball says:

As QTR already pointed out just seconds after the "$200M fine" narrative hit the media (and in this lengthy article that explains the entire situation) Herbalife appears to be stuck between a rock and a hard place.

My official prediction is that the FTC wants to implement Vemma-like reforms and that Herbalife cannot agree to this because it knows that it would be devastating to the business. As a result, we get a PR narrative out of FOX Business News where Charlie Gasparino discloses (before the company?) that the company has made settlement offers ("Herbalife has put up...") that have apparently been rejected.

QTR believes that this is a narrative for doing two things.

1. It could be preparing the public to deal with the fact that Herbalife could be going to litigation. Litigation, for the millionth time, may include the FTC alleging they are operating a pyramid scheme.

2. It could be so that the company can come out after litigation is announced and say "Hey, we tried to be reasonable, but the FTC wouldn't let us settle", in an attempt to try and spin litigation to make the FTC look like they are overregulating (when, in fact, anything short of shutting the company down is not enough regulation here).

Reminder: the litigation against Vemma alleged the company was operating a pyramid scheme. This is what it looked like. I'm guessing an Herbalife complaint would look similar.

Click to enlarge

Despite what the long side of the case has been saying, QTR is reiterating the sentiment put forth in my last article, where I stated that the inability to settle would likely result in the FTC alleging that the company is operating an illegal pyramid scheme.

If this happens, it will be devastating for the company not just as a headline, but also in the chain reaction of restitution that it will undoubtedly set off in other countries. This company operates in over 80 countries, and all of them are going to want a piece of the pie if the FTC officially sues Herbalife. Legal costs alone will be astronomical.

Shouldn't Herbalife Withdraw Guidance?

If Herbalife is planning to make business model changes as part of their offer, and the FTC wants more stringent business model changes, and that is what's holding up the negotiation process, Herbalife guidance should not be relied upon in QTR's opinion.

The company's "raised guidance" that they offered with earnings is contingent upon the company being able to run the same business model that they are running now. Despite some stunning ability to hold it together after making some business model changes in Mexico (that's a whole other article), the business model changes that the FTC would likely ask for could be crippling to the business and make current guidance useless.

Analyst Tim Ramey (who thinks the company's balance sheet is in a "clean state" with negative tangible equity of $320M) said that the company would not have issued guidance if there were serious business model changes on the horizon. This is a copy of Ramey's most recent note, with my annotations.

I would again tell Mr. Ramey that he appears to be 100% wrong.

If the company is stuck on materially negative potential developments of their business model, the responsible thing to do is to withdraw guidance. If the company settles and makes business model changes, they should update or withdraw guidance.

I continue to believe HLF is in a far worse situation than the media is making it out to be, and I continue to stay short.

Disclosure: I am/we are 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.