Herbalife Error not Much Help for Ackman

Its goof counting new members doesn't prove it's a pyramid scheme.

The storied and frequently entertaining history of cringe-inducing corporate data mistakes grew Thursday with Herbalife's disclosure, via contrite SEC filing, that it had overstated new customer growth by as much as 40 percent on conference calls. The company blamed "database scripting errors" for the issue.  

This would be embarrassing and worrisome for any company. But it is far more so for Herbalife, the subject of a protracted public crusade and short-selling campaign by Pershing Square CEO Bill Ackman. Shares were down about 7 percent on Thursday.

The mistake is undeniably sloppy, and some will see it as supporting Ackman's narrative that the company is inherently villainous. But the numbers don't impact past financial statements and weren't filed with the SEC. It's tough to draw a line from this to the most important of Ackman's accusations -- that the company is an illegal pyramid scheme taking advantage of impoverished people. That particular claim might soon be resolved by the FTC, in fact, news that sent the stock soaring last week. 

Progress Halted

Herbalife shares dipped after it revealed that it overstated membership growth numbers on earnings calls

Source: Bloomberg

Still, after years of being publicly beaten up by Ackman, the stock is unusually vulnerable to news like Thursday's restatement. And this was a big error in a number of ways. Twenty-eight different numbers from three different earnings calls needed to be fixed. Herbalife somehow managed to under-report growth multiple times as well, though the overstatements were of a much bigger magnitude:

Our Bad.

Herbalife pretty drastically misstated membership growth numbers, by 40 percent in one case. All numbers refer to growth in the 4th quarter of 2015 compared to the same quarter in 2014.

Source: SEC Filing

Not a good look, and not a boost to Herbalife management's credibility. Correctly counting members seems like it ought to be an Herbalife core competency. And given the scrutiny the company is under, it should be in the habit of double- and triple-checking numbers before making them public. 

Until Thursday, it had been a uniformly disastrous two weeks for Ackman. With the FTC boosting Herbalife and his long bet on formerly high-flying Valeant Pharmaceuticals getting thoroughly thrashed, the day of the dreaded (and wholly invented by me) Bill Ackman Death Cross -- where Herbalife's share price surpasses that of Valeant's -- came perilously close. 

Beware the Ackman Death Cross

Source: Bloomberg

Thursday's news helped the phenomenally successful but recently battered hedge fund manager avoid such ignominy.

But any Ackman victory lap should be confined to quietly circumnavigating his office. His short thesis isn't that the company is sloppy with databases or non-financial metrics, but that its business model is illegal and can't succeed without constantly sucking up and swindling new, unsuspecting victims. Thursday's revelation suggests nothing of the sort.

It's perfectly reasonable to dislike Herbalife or multi-level marketing companies in general. But Ackman's case for the company going to zero hasn't been bolstered. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Max Nisen in New York at mnisen@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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