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Herbalife will stop calling customers 'distributors'

July 30, 2013|By Stuart Pfeifer
  • Herbalife, whose shares reached a 52-week high Tuesday, is changing the way it classifies its customers -- they're now "members," not "distributors."
Herbalife, whose shares reached a 52-week high Tuesday, is changing the… (Mark Boster / Los Angeles…)

Los Angeles nutritional products company Herbalife Ltd. is responding to criticism about its business model by changing the way it classifies its customers. From now on, those who buy Herbalife health and nutrition products for personal use will be called “members” instead of “distributors,” Michael O. Johnson, the company's chief executive officer, said during a conference call with analysts.

The change comes eight months after hedge fund manager Bill Ackman called Herbalife a “pyramid scheme,” noting that most of its distributors lose money. Last year, Ackman’s Pershing Square Capital Management took a $1-billion short position against Herbalife stock.

Pershing Square issued another attack of Herbalife on Tuesday, releasing a list of questions about the company’s positive second quarter earnings report. Among other things, the hedge fund questioned why Herbalife listed the $15 million it has spent this year defending itself against Ackman’s attack as a one-time expense “given that the company has been sued numerous times for being a pyramid scheme.”

Herbalife shares reached a new 52-week high Tuesday morning, one day after the company reported record sales and profit for the second quarter of the year.

“Herbalife’s business is stronger than it’s ever been and the operating results announced yesterday are the best in the company’s history,” Johnson said.

Herbalife products are not available in retail stores. They can be purchased only by people who sign up as independent distributors. The company said the vast majority of its distributors join the company to receive discounts on its products and do not intend to sell them.

Fewer than 1% of people who join the company as distributors make more than $25,000 per year. Consumer and civil rights groups have called on the Federal Trade Commission to investigate. The FTC has declined to comment.

Despite the controversy, Herbalife shares have surged about 90% this year. Ackman’s bet against Herbalife is down about $300 million so far.

“There’s been a whole lot of misinformation spread about Herbalife. As a result Herbalife has become one of the most researched companies on Wall Street,” Johnson said. Investors have purchased shares because the research has shown it is “a sustainable, robust company,” he said.

After reaching a 52-week high of $66.23 early Tuesday, Herbalife shares retreated, but were still up about 5% for the day.

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