Herbalife Ltd. (HLF), the nutrition company at the center of a battle between hedge-fund managers Bill Ackman and Carl Icahn, posted third-quarter profit that beat analysts’ estimates as sales gained in the Americas.
Net income rose 27 percent to $142 million, or $1.32 a share, the Cayman Islands-based company said yesterday in a statement. Profit excluding some items was $1.41 a share, beating estimates. Analysts projected $1.14, the average of six estimates compiled by Bloomberg.
Chief Executive Officer Michael Johnson is working to expand sales of Herbalife’s vitamins, skin creams and meal-replacement shakes in emerging markets while fending off Ackman’s accusations that the company operates an illegal pyramid scheme. Herbalife’s sales volumes in the quarter rose 9 percent in North America, compared with an 11 percent gain in the second quarter, and 32 percent in South and Central America.
“Although trends in North America slowed slightly, they remain near 10 percent,” Meredith Adler, an analyst with Barclays Plc in New York, wrote in a note to investors yesterday. That’s a number “that management finds comforting given the amount of bad publicity the company has gotten in the U.S. because of the loudly-expressed views of Pershing Square.”
Adler rates the shares overweight, the equivalent of a buy.
During a conference call today, Johnson said it will implement formal online training for new sales leaders globally by the end of next year centering on return policies, proper direct selling methods and nutrition club rules. Existing sales leaders will complete annual training, as well.
Herbalife was little changed at $67.93 at the close in New York. The shares have more than doubled this year, compared with a 24 percent gain for the Standard & Poor’s 500 Index.
Worldwide net sales rose 19 percent to $1.21 billion in the quarter. Analysts estimated $1.2 billion.
Profit this year will rise to as much as $5.23 a share, up from Herbalife’s previously forecast maximum of $4.95. Analysts estimated $4.98, on average. Full-year 2014 profit will rise to as much as $5.65 a share, matching the average of analysts’ estimates.
Former U.S. Surgeon General Richard H. Carmona was appointed to the board, the company also said. Carmona, who served under President George W. Bush, is a professor at the University of Arizona and Ohio State University. He also serves on the boards of Clorox Co. and Taser International Inc.
Ackman said in an Oct. 2 letter to investors at his Pershing Square Capital Management that he replaced a portion of his original short position, which was valued at about $1.5 billion, with long-term put options. Pershing Square can still make money if the company fails “within a reasonable time frame” even as it reached an all-time high last month, Ackman said.
The move reduced the equity short position held by Pershing Square to 12 percent from 16 percent of the firm’s $10.8 billion portfolio, he told investors.
Ackman has accused Herbalife of swindling unsophisticated consumers with false get-rich promises using overpriced products that hide a pyramid scheme. He has urged U.S. regulators, elected officials and community activists to help shut it down. Herbalife has repeatedly denied the allegations, saying it makes money from selling unique products.
“Somebody gave me a quote this weekend and said, ‘It’s useless to attempt to reason a man out of a thing he was never reasoned into,’ and that seems to sum up this temporary distraction,” Johnson said, referring to Ackman, at the end of the conference call. “Our focus remains on supporting our members.”
Operators of pyramid schemes typically seek to make money by recruiting new members who pay fees to existing members rather than relying on just the sale of goods and services. The Federal Trade Commission has said modern pyramid schemes can use products to hide their true intent.
In August, Ackman sent a 52-page letter urging Herbalife’s auditor, PricewaterhouseCoopers LLP, to pay attention to “serious accounting and disclosure issues.” The nutrition company hired the auditor in May after its previous accounting firm, KPMG LLP, resigned because of alleged insider trading by an auditor.
PricewaterhouseCoopers is re-auditing statements for 2010 through 2012. Herbalife Director Jeff Dunn, who runs Campbell Soup Co.-owned Wm. Bolthouse Farms Inc. and is a former Coca-Cola Co. president, said in mid-October that he expects a “clean read” when the re-audits are completed. Herbalife expects the re-audits to be completed by the end of December, executives reiterated today during a conference call.
The executives on the call said they would evaluate a 2014 share repurchase plan once the re-audits are completed and more options are available. They also left open the possibility of a capital restructuring, such as a tender offer.
Icahn, who disclosed a 13 percent stake in Herbalife in February, has continued to add to his investment and held about 16 percent of the shares as of June 30.
Billionaire George Soros’s family office also has entered the dispute. Soros Fund Management LLC acquired a 4.9 percent stake in Herbalife valued at $227.5 million as of June 30, according to an Aug. 14 filing. The company was Soros’s third-largest U.S. stock-listed holding at the time.
Herbalife earlier this month lost a bid to dismiss a lawsuit by a former California distributor of its nutrition products who alleged the company’s business model is a pyramid scheme that didn’t allow him to make a profit. U.S. District Judge Beverly Reid O’Connell in Los Angeles denied Herbalife’s request to throw out the case.
The judge said in an Oct. 11 court order, the plaintiff, Dana Bostick, who seeks to represent other distributors in a class-action lawsuit, had sufficiently argued the allegation at that stage of the proceeding for the case to go forward.
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