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Herbalife effort to replace KPMG 'nearing completion,' CFO says

April 30, 2013|By Stuart Pfeifer
  • Herbalife CEO Michael O. Johnson in 2012. On Tuesday, Johnson discussed Herbalife's performance in a conference call with analysts.
Herbalife CEO Michael O. Johnson in 2012. On Tuesday, Johnson discussed… (Irfan Khan / Los Angeles…)

Herbalife Ltd. is making progress in its search for a new accounting firm, executives said during a conference call with analysts Tuesday.

The Los Angeles nutritional products company was forced to hire a new accounting firm after KPMG resigned earlier this month because one of its senior partners was accused of insider trading in Herbalife stock.

The search for a new firm began the day after KPMG's resignation and "has been moving quickly and is nearing completion," Herbalife Chief Financial Officer John DeSimone said.

PHOTOS: Inside Herbalife

Auditing Herbalife's financial records will be a massive undertaking for the new accounting firm. Herbalife operates in 88 countries and has extraordinarily complex financial arrangements with its team of independent distributors. The new firm will also be tasked with reaffirming Herbalife's financial statements for 2010, 2011 and 2012. KPMG withdrew its approval of those statements because of the insider-trading allegations against former senior partner Scott London.

DeSimone said the now-unaudited financial statements stalled the company's efforts to finance the repurchase of its shares.

"We were going down a path; that path has now been blocked by the KPMG issues," DeSimone said.

Discussions about KPMG came during a one-hour conference call with analysts the day after Herbalife reported record first-quarter sales and better-than-expected profit. The $1.1 billion in revenue for the first three months of the year marked a 17% increase from the same period last year.

The good numbers come after a rocky year for Herbalife. The company's shares were hammered last May after hedge fund manager David Einhorn questioned its business model during an analyst call. Seven months later, Bill Ackman, who manages Pershing Square Capital Management's hedge fund, accused Herbalife of operating a pyramid scheme and bet $1 billion that its shares would fall.

But not everyone on Wall Street was swayed by the skepticism about the 33-year-old company. Billionaire investor Carl Icahn bought 15% of Herbalife's shares, betting that Ackman was wrong and that the company would continue to thrive. Herbalife allowed Icahn to nominate two directors to the company's board; shareholders approved Icahn's nominees last week at their annual meeting in Beverly Hills.

In other news from the analysts call, Herbalife President Des Walsh said the company would implement a new policy in June that prohibits its distributors from purchasing sales leads. The step could be viewed as a move to address Ackman's allegations that some Herbalife distributors make more money recruiting new distributors than they do selling the company's line of meal replacement shakes, protein bars, vitamins and teas.

Analysts remain bullish on the company. Seven recommend buying the company's stock, while three suggest holding it. They have an average 12-month estimated price of $55.57 a share, more than 40% higher than its Monday close.

Ackman's allegations focus on the way Herbalife compensates the independent distributors who sell itsĀ  products. These distributors get commissions from their own sales, as well as from the sales of those they recruit into the business.

Ackman noted that about 90% of the company's distributors lose money or break even, while a scant few "at the top of the pyramid" make huge profits. The company said that most people who sign up as distributors do it to obtain a discount and personally consume the products.

The company does not sell its products in retail outlets. Instead, it relies on the distributors, who recruit customers, counsel them about nutrition and fitness and sell products to them. Many distributors advertise with the slogan "Lose weight now. Ask me how."

Herbalife shares were up more than 2% in morning trading Tuesday.


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