Herbalife Tumbles After Overstating Growth in New Members

Herbalife CFO Talks New Member Numbers
  • Database errors led to misstatements on conference calls
  • Company's gaffe hands a win to Herbalife foe Bill Ackman

Herbalife Ltd. tumbled after saying it overstated the growth of its customer and distributor base, bringing another headache to a company facing a federal investigation into whether it’s a pyramid scheme.

A metric called active new members increased 3.2 percent worldwide in the fourth quarter from a year earlier, not the 16.7 percent cited on a Feb. 25 conference call, the Los Angeles-based company said in a regulatory filing Thursday. U.S. active new members increased 30.7 percent, not the 71 percent mentioned on the call, Herbalife said. Those were among more than two dozen instances of misstated statistics, according to the filing.

Bill Ackman
Bill Ackman
Photographer: Chris Goodney/Bloomberg

The shares fell 7 percent to $52.42 at the close in New York, the biggest drop since Oct. 7. The stock is now down 2.2 percent this year.

The announcement may embolden Bill Ackman of Pershing Square Capital Management, who is shorting the company’s shares and says it’s an illegal pyramid scheme. Herbalife said it discovered the incorrect information, which resulted from database errors, on March 1. The company began tracking the metric last year in connection with changes in its marketing plan and first reported the figure in its second-quarter 2015 earnings call. Herbalife said it didn’t notice the errors sooner because “it had limited visibility into the likely rate of change in this metric upon first use.”

Herbalife relies on independent distributors to sell its products, which range from weight-loss shakes and supplements to snack bars and skin creams. However, many of the company’s distributors are actually customers who sign up as members to receive discounts on their products.

While the mistake is embarrassing, and will raise suspicions among investors who already are skeptical of the company, the numbers themselves aren’t particularly problematic for the company, said Ken Shea, an analyst at Bloomberg Intelligence. The errors also don’t affect the company’s historical financial statements.

“The meaningful cloud over this company is the one that Ackman’s charging them with, and this doesn’t appear to be connected,” he said. “I see today’s announcement as separate from that.”

Herbalife, which has denied Ackman’s allegations, said last month that it’s in talks with the U.S. Federal Trade Commission about resolving a probe into whether the company is a pyramid scheme.

The company already has made some of its sales practices more conservative. For example, Herbalife increased the time needed for outside distributors to qualify for key financial incentives, reducing pressure on them to buy products before they have customers. That means someone could sign up to be an Herbalife representative and take 12 months to buy a certain amount of product -- rather than one or two -- and still be eligible for the same rewards.

Whitney Tilson, the founder of Kase Capital Management and an investor betting against Herbalife, said the errors call into question the company’s health and sustainability.

“It puts a real hole in management’s credibility, as well as the story here that Herbalife is a healthy, growing business,” Tilson said in an interview with Vonnie Quinn on Bloomberg Television. “A major piece of evidence that management has cited to support that story line has just been demolished.”

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