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Herbalife fourth-quarter sales, profit beat Wall St. forecasts

Herbalife's fourth-quarter results shine, but the L.A. firm could spend up to $20 million to dispute allegations it is operating a fraudulent pyramid scheme.

February 20, 2013|By Stuart Pfeifer, Los Angeles Times
  • Sales of Herbalife's weight-loss and nutritional products increased 20% to $1.1 billion in the fourth quarter, and it reported a profit of $1.05 a share, a 22% jump from a year earlier. Above, Herbalife's distribution Center in Carson.
Sales of Herbalife's weight-loss and nutritional products increased… (Mark Boster, Los Angeles…)

Herbalife Ltd. had some good news — and a little bad — as the nutritional products giant released its fourth-quarter results.

The good: Sales of its weight-loss and nutritional products increased 20% to $1.1 billion in the quarter, and profit surpassed Wall Street's projections. And the company expects 2013 to be even better.

The bad: Herbalife could spend $10 million to $20 million this year in "legal and advisory services" to fend off allegations made by a Wall Street hedge fund manager that it is operating a pyramid scheme. It also divulged in a regulatory filing that the Securities and Exchange Commission is examining its business practices.

Investors expect to hear more from the company Wednesday, when executives hold a conference call with analysts to discuss its 2012 results and expectations for the coming year.

Shares of the Los Angeles company were largely unchanged in after-hours trading, after closing up $1, or 2.6%, to close at $39.74 during the regular session.

Herbalife reported a profit of $1.05 a share in the fourth quarter, a 22% increase from the same period a year earlier. Both the company's quarterly profit and sales surpassed Wall Street projections.

"There's not a lot of bad news in those numbers," Alan Knuckman, chief market strategist for Optionshop, told Bloomberg News.

The strong results could come as a welcome relief for the company, which has been one of the hottest stories on Wall Street. In December, billionaire investor Bill Ackman accused Herbalife of operating a pyramid scheme and said he had taken a $1-billion short against the company's shares.

Ackman said most of the company's independent distributors lose money or break even while a lucky few who got into the company early get rich from commissions for bringing others into the business.

Herbalife denied the allegations, saying all of the commissions it pays are related to sales, not recruiting. The company said it sells nutritious products through a team of independent distributors who build one-on-one relationships with consumers, coaching them about weight loss while selling products to help them achieve their goals.

The company reported Tuesday that its products are sold in 88 countries through a network of 3.2 million independent distributors. It has about 1,500 full-time employees in the United States and 6,200 worldwide.

Its meal-replacement shake mixes, vitamins and other supplements are available only through independent sales people, not at retail stores.

Ackman's December disclosure caused Herbalife shares to plummet more than 40% in one week, but they slowly recovered after other hedge fund managers snapped up the beaten-down shares. Most notably, investor Carl Icahn disclosed last week that he had purchased nearly 13% of Herbalife's shares and planned to inquire about bringing the company private, a move that would probably drive up Herbalife's stock price.

Herbalife was among the discount buyers. The company said it repurchased 11 million shares in 2012 — twice as many as it did in 2011. It bought an additional 4 million shares in January and February of this year, the company said.

Herbalife discussed the debate in Tuesday's regulatory filing, saying the company follows Federal Trade Commission recommendations in its business model.

"As has been reported in the national media, a hedge fund manager publicly raised allegations regarding the legality of our network marketing program. We believe, based upon the advice of experts and prior guidance from the FTC in this area, that our network marketing program is compliant with applicable law."

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