Herbalife Tops Estimates, Expects to Make Changes Overseas

  • Nutrition company settled probe with FTC earlier this month
  • Herbalife says it will probably adopt changes worldwide

Herbalife Ltd., which resolved a federal probe into its operations last month, posted second-quarter results that topped analysts’ estimates and said it expects to overhaul its business practices globally.

Earnings were $1.29 a share, excluding some items, the Los Angeles-based company said on Wednesday after the market closed. The average estimate of two analysts was $1.21 a share, according to data compiled by Bloomberg. Sales rose 3.4 percent to $1.2 billion, in line with the $1.19 billion that analysts projected.

The results signal that Herbalife is stabilizing after a slowdown last year, triggered in part by changes to its business model. The company has been fighting back against a three-year campaign by billionaire short seller Bill Ackman, who alleged that Herbalife is a pyramid scheme and spurred the investigation by the U.S. Federal Trade Commission. That probe ended on July 15 with Herbalife agreeing to pay $200 million and make further changes to its sales practices. But the agency didn’t weigh in on whether the company is actually a pyramid scheme.

The shares rose 3.6 percent to $69.48 in late trading after the results were posted. Herbalife shares had already climbed 25 percent this year, bolstered by the FTC settlement.

Global Plan

Herbalife raised its profit outlook for the year, calling for adjusted annual earnings to reach as much as $4.80 a share. That was up from a previous range of up to $4.75. The company reiterated sales growth of as much as 4.5 percent.

The FTC settlement only affects Herbalife’s U.S. operations. But the company said on Wednesday that it will “likely roll out” certain aspects of the agreement worldwide, once it gains more insight from how the changes affect the domestic market. Implementing the agreement will have one-time costs of as much as $50 million, the company said.

“We have the greatest confidence in our ability to comply with the agreement and grow our business in the U.S. and worldwide,” Chief Executive Officer Michael Johnson said Wednesday on a call with analysts.

The FTC settlement calls for the company to stop its distributors from making misleading claims about how much money can be made selling Herbalife’s weight-loss shakes and teas. Ackman and his hedge fund, Pershing Square Capital Management, have said that without these stories of wealth, the company would have trouble recruiting people into the business.

Real Customers

Another critique of Ackman’s has been that Herbalife has few real customers and that the majority of purchases are being made by people trying qualify for compensation. Having real customers -- what the FTC calls retail sales -- is one of the agency’s key tests of whether a company is a pyramid scheme. The FTC cast doubt on how much retail sales Herbalife’s distributors are generating, saying financial rewards are driven by recruiting -- not retail sales.

The settlement now puts the onus on Herbalife to prove it does in fact have retail sales by tying distributor payouts in the U.S. to that benchmark. Within 10 months, Herbalife has to shift the compensation model from how much Herbalife product a distributor buys to how much is sold. This also goes for the network of people a distributor has recruited to Herbalife -- what’s called a downline. The company said Wednesday that it’s rolling out systems to track purchases in the fourth quarter.

Verified Names

These sales must be verified receipts that include customers’ names, payment methods and quantities sold. Over the course of Ackman’s campaign to take down the company, Herbalife hasn’t disclosed retail sales figures. It’s said that after it sells to distributors it couldn’t be sure what happened to its products. In attempt to defend itself, it pointed to third-party surveys that showed it had almost 8 million customers in the U.S.

Despite losing money on his $1 billion bet against Herbalife’s stock, Ackman said the changes brought by the settlement left him confident that the company will eventually collapse. Ackman has said that his strategy going forward will include using the FTC’s complaint to drum up interest from regulators in other countries.

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