Herbalife Runs Out Of Time: Yesterday's Solution For Today's Problem

| About: Herbalife Ltd. (HLF)
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Summary

There is no evidence Herbalife can survive the transition in their business model.

Herbalife's meal replacement concept is out of sync with current insights in diet and health.

Herbalife's diversification of their product mix copies every other MLM.

Our old mess sergeant's taste buds had been shot off in the war.
But his savory collations add to our esprit de corps.
To think of all the marvelous ways
They're using plastics nowadays.
It makes a fella proud to be a soldier!
(Tom Lehrer - It Makes A Fellow Proud To Be A Soldier)

In a recent article, the argument was advanced that Herbalife (NYSE:HLF) was positioned to Profit from the Obesity Pandemic, which is essentially the rationale the company has always given. The article simply postulates that the issues around the business structure have been resolved, which seems unrealistic as they only came into full effect on May 25th and the early signs are that the transition to the new model is not as easy as management tries to make it out to be. Material criticism of the medical merits of the article came from some time SA-author Dave Ritchie.

There have been significant insider sales, one exec left on a lateral move for Avon, and there are declines elsewhere, particularly in China where the VP in charge quit, and more recently, there were reports that their CFO for China quit also. Realistically therefore it should be expected that the next few quarters will reveal the real effect of all these changes. To think that the implementation of the changes under the FTC settlement will be smooth or successful seems dubious in as much as the entire transition strategy was based on management's denial of the very purpose of the order, and the transition from a recruiting-based to a sales-based organization cannot be easy with overpriced products. Nevertheless we will leave all these question marks aside as they were the focus of my last article, and focus on the major product strategy about meal replacements.

When we put it altogether, Herbalife will be shown to be a bigger short now than it ever was in the last four years. Unsurprisingly short interest has been rising.

Context: product strategy

The Herbalife product strategy is based on a dieting concept that has been thoroughly invalidated by the last twenty years of publications in the area, starting with T. Colin Campbell's The China Study and Caldwell Esselstyn Jr.'s Preventing and Reversing Heart Disease. The SAD (Standard American Diet) is about as healthy as the fare served up by the mess sergeant in Tom Lehrer's song (above). The Herbalife meal replacement strategy rests solidly on the assumption that people continue to have atrocious diets, where a few meals replaced with a Herbalife shake would offer some relief. This seemed plausible thinking 30 or 40 years ago, but it is long since obsolete, specifically the meal replacement strategy is dubious because it bypasses the role of saliva in proper digestion.

Ever since the publication of The China Study, we have for the first time a viable, evidence based foundation for the nexus of health and nutrition, and the conclusions include the fact that dieting is obsolete, and the only option, as distasteful as it may seem to some, is to eat healthy food, specifically what is now known as WFPB, a Whole Foods Plant-Based, or also plant-strong diet. The scientific evidence is so strong that it has allowed PCRM, the Physicians' Committee for Responsible Medicine to prevail in numerous lawsuits in this area. Most recently, the testimony of PCRM founder Dr. Neal Barnard was instrumental in a lawsuit in LA County, which secured a guaranteed vegan option at every school meal in Los Angeles County starting this fall. Interestingly, that is where Herbalife is based...

With a WFPB lifestyle the only supplements that may be desirable are B12 and some D3, all the rest can be better supplied from food, for it is the complete matrix of nutrients which makes it work. And if that were not enough, there is a growing body of evidence that simple molecular hydrogen dissolved in water is the best antioxidant in the world, and beautifully complements the nutrition provided by plant-based foods, by ensuring homeostatic levels of glutathione, superoxide dismutase (SOD), and catalase - meaning anyone can have the immune system of a twenty-year old. It could not be simpler, moreover H2 can never be toxic, different from anti-oxidant supplements, which can be overdosed.

Most importantly, the meal replacement idea always leaves people somewhat unsatisfied, and is one of the many reasons why so many people fail with this or other diets. The whole point of the WFPB revolution is that you can eat what you like as long as you stick to plant-based and oil-free and for most folks in six months to a year you will be back at your fighting trim and all your vitals should vastly improve. I speak from experience.

In short, the new trend is towards getting essentially complete nutrition from food, and avoiding the whole notion of dieting in favor of simply eating healthy foods in the first place and also avoiding supplements with their attendant risks of overdosing and toxicity risks. Herbalife has periodically been reported in the context of liver toxicity, such as here, and an interesting NIH report here. A class-action lawsuit is attempting to be mounted pursuant to this info, and there is a report from October 15th, 2015 on the same issue in the New England Journal of Medicine.

The healthcare angle

Evidently, it makes no sense that 90 OD deaths from opioids are a national crisis, but 1,671 deaths from heart disease are business as usual, even though heart disease is now known to be completely preventable or reversible by diet in many cases. The logical observation is that meat and whipped cream kill twenty times more people than opioids do and yet some doctors still argue that people can't change. It is becoming evident that, even if only slowly, doctors are changing and that patients are following, as shown by the work of Esselstyn, and many others, including PCRM and, here in the Bronx, where I live, cardiologist Dr. Robert Ostfeld teaches WFPB to his patients and to medical students at Einstein Medical College. He, and many other doctors like him, will tell you at the drop of a hat that this simple dietary change brings bigger improvements in people's medical condition than ANY medication ever has. In short, along with the fact that there is now an evidence-based insight in the relationship of health and diet, it is soon coming to you from a medical school and a doctor's office near you, where traditionally it was ignored. Diet used to be left to the quacks like Dr. Atkins, or con men like Mark Hughes. No longer.

No wonder then that Russell Simmons recently observed that SNAP is hurting the poor because it pays for junk food and thereby fuels the healthcare crisis. In other words SNAP benefits finance diabetes and heart attacks we cannot afford, for it sets people up to buy the cheese and other products that undermine their health. A devastating critique of our basic food addictions can be found in Dr. Neal Barnard's recent best-selling book The Cheese Trap. It turns out that the story of the obesity epidemic is pretty much the story of a ten-fold increase in cheese consumption in the last hundred years, and a few Herbalife shakes are besides the point - we should stop eating cheese (and any other animal protein). The results are amazing.

When people argue that veganism is extremist, Dr. Caldwell Esselstyn Jr., who is a cardiologist, and developer of the eponymous diet, argues that on the contrary, coronary bypass surgery is an extreme measure, particularly if we know it is preventable and often a reversible condition with changes in diet alone. Taking heed to Simmons and limiting SNAP to healthy fruits, vegetables, whole grains, and legumes etc. would do more to lower healthcare costs in the long run than cutting SNAP eligibility but continuing to sponsor obesity by it. The real solution to our healthcare crisis lies there.

Change is happening faster than you think

Plant-based nutrition has its own Woodstock, dubbed Plant-Stock, now in its sixth year, which is the perfect symbol for the rapid growth of this new nutritional trend.

Veganism is growing like wildfire in Israel, it is very big in the UK, and it is growing rapidly in the US and many other countries. I see people in my generation who make the change for health reasons and in no time get off of all or most medications, and instead of worrying about the side effects of medications for the rest of their lives, they live active and productive lifestyles.

There are movements among younger generations, exemplified by the Green Bronx Machine, which is turning a food desert in the South Bronx into an oasis. I see many other initiatives where younger people are becoming engaged in growing numbers. In short, the ghetto is not what it used to be and McDonald's and other fast food restaurants are losing customers rapidly. Older customers are dying from heart disease, and others become vegan and live to fight another day and teach their children and grandchildren they have other options. The odd veggie burger at Wendy's is not going to cut it - eating whole foods and avoiding added oils are the keys to a healthy diet and the restaurant business is caught flat footed, fast food in particular.

In short again, dieting is out, healthy lifestyles are in.

Sustainability intersects with health

The simple fact is that animal protein is 10-20 times more resource intensive than plant protein, hence the UN is pushing plant-based nutrition as part of its climate agenda and some countries are following suit. The outcome of The China Study is simply this:

  • We need only 10% of calories from protein, not 20% as in the Standard American Diet.
  • Almost all degenerative diseases we suffer from are related to excessive intake of animal proteins, and preventable or even partly or wholly reversible.
  • Animal protein spurs cancer growth, plant protein does not.
  • A WFPB diet almost automatically guarantees the correct proportions: plant proteins at a proportion of 10-15% of calories, with more fiber, which is also healthy.
  • The elimination of meat, dairy, fish and fowl consumption will do more for sustainability than electric cars and solar panels.
  • These personal health improvements and global sustainability go completely hand in hand.

Other implications

Besides Herbalife itself, the entire diet and supplement industry will be increasingly affected by this growing trend. The diet industry has been ruled by fads like the Atkins diet, and Herbalife and other meal replacement products. Though change takes a generation, these fad-diets won't stand up for long against the emerging trend of science-based nutrition that is an absolute first. The recently updated China Study is an absolute eye-opener, and for trend watchers the litigations by PCRM are a good indicator. Solid evidence is winning the day.

The pharmaceutical industry also will be hugely affected by this emerging trend. Entire classes of drugs will become largely superfluous, from statins, to blood pressure medications, to antacids, to baby aspirin, allergy meds, as well as large amounts of diabetes medications. The new documentary What the Health, by the makers of Cowspiracy explores these issues in depth. In short, this is a trend which will alter the investment landscape in an unprecedented way.

Eventually, it is bound to be the largest single contribution to solving the healthcare crisis, for the only reason healthcare costs are spiraling out of control is because of a wide range of degenerative diseases that are largely preventable and often reversible with diet alone - and you will feel better to boot! Speaking from personal experience: at age 65 I was free of any meds, and since then I have been phasing out most supplements as my diet evolved towards a fully plant-based lifestyle. Staying healthy lasts longer and it is cheaper.

Summary

Yo-yo dieting is a bigger health problem than obesity, and is a direct result of the failure to transition to simple healthy eating. The whole notion of meal replacements on which Herbalife is based, critically rests on the notion that people will not change their diets, which is now understood to be the one thing that is needed, and growing numbers of people are doing it. The WFPB lifestyle is immensely satisfying and easy to do with the support tools that are widely available, such as the free 21-day kickstart program from PCRM.

Conclusion

The very notion of meal replacements as a diet solution is being invalidated by a complete paradigm shift around the food and health nexus, which is gathering speed. In short, the fundamental premise of Herbalife's product strategy has become obsolete, and the forced changes to their marketing plan are likely to continue to erode earnings. The recent downward guidance is likely to be the first of many and the stock will be drifting down, and is ripe for a sudden plunge as insider sales and executive departures, as well as distributor churn, take their toll. By the 2Q17 reports the current stock price will be in the rear-view mirror, as we leave the bubble of relief over the FTC settlement behind us, the $40 to $50 level is likely to be the next stop. There is no viable forward strategy in place at Herbalife, and storm clouds are gathering.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.