Herbalife Tumbles as Ackman-Prompted Changes Hurt Sales

Herbalife Ltd., which adjusted some sales policies in response to criticism from hedge-fund manager Bill Ackman, dropped after the changes hurt sales last quarter.

The stock sank 21 percent to $44.26 at the close in New York, following the company’s earnings report yesterday. The drop was the steepest since November 2008 and pushed the shares’ loss for the year to 44 percent.

Herbalife, which cut its earnings forecast for the year yesterday as sales declined in the Americas, has been fighting an almost two-year assault by Ackman, who says the company is an illegal pyramid scheme. He’s also helped push the U.S. Federal Trade Commission to investigate practices at the Los Angeles-based maker of weight-loss shakes and nutritional supplements.

The company, which has repeatedly denied being a pyramid scheme, has given its independent distributors the option of taking more time to reach sales goals. That’s hurt revenue gains, Chief Financial Officer John Desimone said yesterday in an interview.

“The changes that are impacting our business today are changes that are proven to build long-term value and been proven in the markets they’ve tested in,” Desimone said. “Our opportunity long-term has never been greater than it is today.”

While the changes are causing an initial drag on sales, they help the distributors build more sustainable businesses, Desimone said.

Herbalife yesterday posted third-quarter profit that trailed analysts’ estimates.

U.S. Sales

Net income fell 92 percent to $11.2 million, or 13 cents a share, the company said in a statement. Excluding some items, profit was $1.45 a share, missing the $1.51 average of four analysts’ estimates compiled by Bloomberg.

Revenue rose 3.5 percent to $1.26 billion in the quarter, trailing analysts’ projections. Sales in North America declined 2.3 percent to $223.5 million, and revenue slid 15 percent to $205.2 million in South and Central America. Excluding the effect of foreign-currency exchange-rate fluctuations, sales in South and Central America would have fallen only 1.1 percent.

Profit in the quarter was reduced by 97 cents a share, in part, to remeasure the value of its assets in Venezuela. Other items that affected profit included expenses to respond to attacks on its business model, the FTC inquiry, legal reserves, and the impairment of some manufacturing equipment, as well as non-cash interest and amortization costs.

Adjusted profit per share in this year will be $5.80 to $5.90, down from a previous forecast of $6.17 to $6.32, Herbalife said. Analysts estimated $6.26, on average.

Business Model

Herbalife last week agreed to pay $15 million to settle 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.

General Counsel Mark Friedman said in an e-mailed statement that while Herbalife was confident it would have prevailed in the case, it was in the company’s best interest to settle the matter and focus on growth.

Herbalife, which also has been probed by the Federal Bureau of Investigation and several states, last month hired former Federal Trade Commission official Pamela Jones Harbour to the new role of head of compliance. Harbour served an FTC commissioner from 2003 to 2010 and most recently was a partner helping head the privacy and data-protection team at law firm BakerHostetler.

Desimone repeated yesterday that the company is fully cooperating with the FTC probe.

The company also said that Leroy Barnes will retire as a director on Feb. 17 after more than a decade on the board. Director Richard Bermingham will assume his position as chair of the audit committee effective today.

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