Herbalife sales are up 270% since Michael Johnson became CEO. Above, workers… (Mark Boster, Los Angeles…)
Herbalife Ltd., battling a billionaire investor's bet that its stock will tank, is expected to reassure shareholders at the company's annual meeting Thursday that the Los Angeles nutritional products maker is a strong, healthy, legitimate operation.
The meeting at the Beverly Hilton comes amid lingering questions about Herbalife's future. For several months, two activist investors have put the company's core operation at issue.
Bill Ackman has bet $1 billion that the company is a pyramid scheme that will fail, and Carl Icahn bought 15% of Herbalife's stock, wagering that its business is legally sound and will withstand Ackman's attack.
This month, two more hurdles were thrown in the company's way.
Accounting giant KPMG resigned as Herbalife's auditor and withdrew its approvals on three years worth of the company's audited financial statements after a KPMG senior partner was accused of insider trading.
Then an Herbalife distributor from North Hollywood filed a lawsuit accusing the company of operating a pyramid scheme "that pays millions to those few at the top in recruiting rewards at the expense of the many at the bottom."
The battle over Herbalife's business model centers on the way the company pays its team of independent distributors to sell its shake mixes, nutrition bars and supplements. Distributors receive commissions on their sales and on sales by people they recruit into the business — and on sales by those further down the recruiting ladder.
Ackman said that nearly 90% of Herbalife salespeople make no profit or lose money and that they end up with unused product they cannot sell. Meanwhile, he said, those who recruited newer distributors reap profits.
Herbalife Chief Executive Michael Johnson said Ackman's attacks were unfounded and based solely on greed: If the company's stock price falls, Ackman profits.
Most of Herbalife's distributors do not intend to make money, Johnson said. Rather, they sign up as distributors to get discounts on products they personally use, he said.
The company declined to say what Johnson plans to tell shareholders Thursday, but it released a statement that said the company is on sound financial ground. Herbalife reported record sales and profit last year and forecast better numbers this year. It is scheduled to release its first-quarter results next week.
Under Johnson, Herbalife's revenue has grown more than 270%, to $4.1 billion last year from $1.1 billion in 2003, spokeswoman Barbara Henderson said.
"Herbalife's business model, ethics and viability are currently being discussed by the media for one reason — a billionaire hedge fund manager has a reckless $1-billion bet that he can drive a successful 33-year-old company out of business for his own profit," she said.
Herbalife's stock price skidded 40% in the days after Ackman disclosed in December that he had taken the huge short position against the company and argued in a presentation on Wall Street — streamed live on the Internet — that it was a pyramid scheme and that its stock would fall to zero.
Taking a short position involves borrowing shares at a high price and selling them, expecting to repurchase them later when the price falls and, thus, profit from the decline in stock prices.
The company fought back, telling analysts at a January presentation that Ackman was either mistaken or intentionally distorting the truth for profit.
Icahn, whose investing prowess helped him become one of the wealthiest men in the United States, then stepped in and started buying Herbalife's beaten-down shares. He said he would help the company explore its best options, including delisting the stock and going private.
The company's shares rebounded, in part because of Icahn's massive investment. Herbalife gained 67 cents, or 1.8%, to $37.27 on Wednesday. Though the stock has increased 54% from its Dec. 24 low, it is still 12% lower than the day before Ackman made his first public accusations.
Founded in 1980, the company has faced similar criticism for decades. But this is the first time a major Wall Street figure made such a case and backed it with a huge financial bet.
In arguing that the stock would fall to zero, Ackman predicted that regulators would intervene and shut down the company's operation.
Philip Dracht, a Salt Lake City attorney for the North Hollywood distributor, said his case could have huge consequences for Herbalife. He has asked that the lawsuit, filed in Los Angeles, be certified as a class action on behalf of hundreds of thousands of distributors who joined Herbalife since 2009.
The company has paid settlements to resolve distributor lawsuits in the past without acknowledging wrongdoing. Dracht said his case could help resolve lingering questions about the legality of Herbalife's business model.
"We certainly think this is going to be a long, drawn-out fight," Dracht said Wednesday. "I don't know if they think this will be a chance to vindicate themselves."