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Ackman Attacks Herbalife Again With Laundry List of Doubt

Herbalife Gains After Raising Full-Year Profit Forecast
Plants stand in front of Herbalife Ltd. signage displayed outside of the company's corporate headquarters in Torrance, California. Photographer: Patrick Fallon/Bloomberg

Bill Ackman continued his assault on Herbalife Ltd. after the company reported second-quarter results, questioning everything from its accounting of Venezuelan exchange rates to rising expenses.

Just after U.S. markets opened today, the founder of New York hedge fund Pershing Square Capital Management LP issued a press release filled with arcane questions for the nutrition-supplement company. Sample: Why does Herbalife “have such meaningfully negative operating leverage in second quarter 2013 and in its projections for 2013 full-year operating income?”

Ackman in December said he had shorted 20 million shares of Herbalife because it was an illegal pyramid scheme, a charge the company has denied time and again. After Ackman released his statement today, the shares reversed course. Earlier they had gained as much as 9.3 percent after the company yesterday raised its earnings forecast, and second-quarter profit-per-share topped analysts’ estimates. The shares fell 0.9 percent to $60.05 at the close in New York. They have gained 82 percent this year -- generating losses for Ackman.

In a telephone interview, Chief Financial Officer John Desimone declined to respond directly to Ackman’s statement, saying “we prefer to take the high road” and will instead continue to “educate investors on the real Herbalife.”

In his press release, Ackman wanted to know why Herbalife uses the ratio of 6.3 Bolivars to $1 for accounting when the company discloses that it’s been unable to convert at that rate and it uses a 10 to 1 rate for its profit forecasts.

Bolivar Accounting

Venezuela accounts for about 4 percent of total sales, Desimone said. Using 10 to 1 for forecasts is a more conservative rate that reflects the company’s expectation that the Bolivar will be devalued further, he said. Other U.S. companies with operations in Venezuela use the same method, Desimone said.

Based on Herbalife’s share price of $64.09 in late trading yesterday, the hedge fund manager has lost about $310 million on his bet. The estimated loss assumes Ackman put on the short position at a price of $48.58, the average between May last year, when he first shorted the stock, according to investors, and Dec. 18, the day before he disclosed his short position. Ackman hasn’t provided details of his position. He said in the statement today that he still is short the company.

Short Pressure

Ackman’s short position, a bet that a stock will fall, may come under more pressure as Herbalife said it would resume its share buyback program. The company’s annual earnings forecast includes spending $50 million on share repurchases this quarter, although it could exceed that, Desimone said, and pointed out that it spent more than $400 million on buybacks in the second quarter of 2012.

Executives declined to address Ackman directly on a call earlier today to discuss the results. Chief Executive Officer Michael Johnson did say that all the “misinformation” over the past seven months has made Herbalife one of the most researched companies in the world and in that time it’s proven its sustainability and financial strength.

“In the long run, Mr. Ackman has done Herbalife an enormous favor,” Timothy Ramey, an analyst for D.A. Davidson & Co. in Lake Oswego, Oregon, said in an interview on Bloomberg Television. “He has precipitated a level of scrutiny that is intense. When the answers are in and people have vindicated the business model, this stock will be much, much higher.”

Changing Misconceptions

The company said it took another step toward clearing up misconceptions by changing what it calls participants. People who join will now be called members, instead of distributors. These members can then become sales leaders by selling products and recruiting members.

One of Ackman’s main criticisms of Herbalife’s multilevel marketing business model is that the majority of its revenue comes from recruiting more and more sales people, instead of selling products to consumers.

Herbalife said that according to analysis of its database, 71 percent of people who join the company only buy products for their own consumption and haven’t recruited people. Also, in June it disclosed a Nielsen survey that 7.9 million U.S. adults bought its wares in the previous three months.

Carl Icahn, the 77-year-old activist investor, disclosed a stake in Herbalife in February and is now its largest holder with a 16.5 percent stake as of May 7, according to data compiled by Bloomberg. Icahn said has said the company should consider going private. Desimone declined to comment on whether this is being considered or if Icahn is pushing for a transaction.

Excluding some items, second-quarter profit was $1.41 a share, Herbalife said in a statement yesterday. That topped the $1.18 average of five analysts’ estimates, according to data compiled by Bloomberg. Profit this year will be as much as $4.95 a share, up from a previous projection of a maximum of $4.80, the company also said. Analysts’ estimated $4.78, on average.

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