Herbalife Falls After Fund Manager Queries Disclosure

Hedge-fund manager David Einhorn has questioned Herbalife Ltd. (HLF), a maker of nutritional and weight loss supplements, about why it stopped providing information about distributors in filings.

The shares had their biggest two-day drop since they began trading in December 2004 after Einhorn, chairman of Greenlight Capital Re Ltd. (GLRE), questioned executives on a conference call with analysts and investors yesterday. Herbalife, which sells vitamins, shake mixes and skin gels through a marketing network of independent distributors in 81 countries, had gained 36 percent this year before May 1.

Einhorn asked why Herbalife had stopped disclosing a breakdown of three groups of distributors in filings that it had previously provided. He also asked for an explanation of financial incentives given to supervisors who sign up new distributors. The independent contractors earn revenue by selling products directly to customers and recruiting new distributors, for which they earn a share of those sales and incentives from the company.

The shares dropped 6.4 percent to $52.70 at the close in New York after plunging 20 percent yesterday.

Chief Financial Officer John DeSimone told Einhorn on the call that when he took over as finance chief in January 2010 he decided to stop breaking out information on distributor groups as it isn’t “valuable information to the business or to the investors.” Herbalife “can easily provide the exact same breakout going forward,” DeSimone told Einhorn.

Short-Selling Lehman

“That sort of follow-up” would be “helpful,” Einhorn said on the call, which followed the company’s report on its first-quarter results.

Einhorn, known for short-selling Lehman Brothers Holdings Inc. before the firm collapsed in 2008, has more recently put pressure on companies such as Green Mountain Coffee Roasters Inc. (GMCR), questioning its accounting disclosure in October.

Green Mountain fell the most in two months on Oct. 17 after Einhorn called for improved disclosure and said the market for its Keurig single-cup brewers is “limited.”

“The fact that recognized short seller David Einhorn asked questions on the call put pressure on Herbalife’s stock price,” the company said in a statement yesterday. “Mr. Einhorn’s questions raised no new subjects or concerns,” it said. “Our business fundamentals are very strong and we are confident in our financials, our disclosures and our network marketing business method.”

‘Excellent Quarter’

Einhorn declined to comment on Herbalife’s statement, Jonathan Gasthalter, a spokesman for Greenlight, said by telephone yesterday.

“Herbalife shares are down hard,” after Einhorn questioned Herbalife’s disclosure, Tim Ramey, an analyst at D.A. Davidson & Co., said in a note to clients yesterday. “This was an excellent quarter from an excellent company with high ethics and strong accounting.”

The company said on April 30 that net income in the first quarter increased 23 percent to $108.2 million as revenue advanced 21 percent to $964.2 million. It raised its full-year guidance to a range of $3.58 to $3.74 from an earlier forecast of $3.40 to $3.60.

To contact the reporters on this story: Chris Burritt in Greensboro at cburritt@bloomberg.net; Duane D. Stanford in Atlanta at dstanford2@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.