Last July, Herbalife directors approved the repurchase of $1 billion worth… (Mark Boster, Los Angeles…)
Herbalife Ltd. said it had to scale back plans to repurchase its shares after KPMG resigned in early April as its auditor and withdrew its review of the company's annual financial statements for the last three years.
The Los Angeles nutritional products company canceled plans to borrow money that "would have been used to repurchase a meaningful amount of company stock," John DeSimone, Herbalife chief financial officer, told analysts Tuesday in a conference call.
KPMG withdrew its approval of Herbalife's 2010, 2011 and 2012 financial statements after the accounting giant accused a senior partner of insider trading in the shares of Herbalife, footwear maker Skechers USA Inc. and other companies.
In July, Herbalife directors approved the repurchase of $1 billion worth of shares. Its first-quarter report filed with federal regulators indicated it had spent more than $200 million by the end of March. The company did not disclose how much of the repurchase plan was put in limbo by KPMG's resignation.
DeSimone said Herbalife now will probably spend less to repurchase fewer shares than it might have otherwise.
"We were going down a path; that path has now been blocked by the KPMG issues," he said, noting that the company will continue to repurchase some stock "on an opportunistic basis."
The KPMG scandal came at a difficult time for Herbalife. For four months, the nutritional supplements maker has been fighting hedge fund manager Bill Ackman's allegations that the company operates a complex pyramid scheme. Ackman said he took a $1-billion bet on Wall Street that Herbalife shares would fall to zero.
Ackman's allegations led to a massive sell-off in the company's shares in December. But rival investor Carl Icahn immediately started buying what would amount to more than 15% of Herbalife shares, betting that Ackman was wrong and the company would continue to thrive. Icahn's holdings are worth more than $600 million.
As Wall Street watched Herbalife's shares to see which billionaire would prevail, the company was sent reeling by KPMG's resignation. Herbalife's search for a new accounting firm "is nearing completion," DeSimone said.
Auditing Herbalife's financial records is likely to be a massive undertaking for the new accounting firm. Herbalife operates in 88 countries and has extraordinarily complex financial arrangements with its worldwide team of independent distributors.
Discussions about KPMG arose during an upbeat conference call with analysts a day after Herbalife reported record first-quarter sales and a 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 company earned $118.8 million.
Still, the company said, sales growth in the United States was slower than in other regions. Herbalife President Des Walsh said he did not believe the slowdown was related to media coverage of Ackman's allegations.
"We believe the noise out there is not having any material effect on our business," Walsh said.
During the call, company executives did not mention Ackman by name. DeSimone said only that the company spent $9.5 million in the first quarter "responding to attacks on the company's business model."
Ackman has said that about 90% of Herbalife's independent distributors make no money selling the company's products, while a fortunate few make huge profits based on commissions from sales by others they brought into the business.
The company has said that most distributors do not join Herbalife to make a living. Rather, they sign up to get discounts on the company's meal replacement shake mixes, protein bars and other items that they and their families personally consume.
Walsh pointed out that about 70,000 new distributors joined Herbalife in the United States in the first quarter. He also addressed some of the criticism during the call with analysts.
"Building a business at Herbalife is not dissimilar to a gym membership. Results vary with time, energy and the dedication that one puts into it," he said. "There are no shortcuts to riches and no guarantees of success.
"However, for those distributors who devote their time and energy to develop a stable base of customers and then mentor and train others to do the same," he said, "there is ample opportunity for personal growth and ... full-time income."
Herbalife shares gained 96 cents, or 2.5%, to $39.71 on Tuesday.