Reasons to Worry About Herbalife: Greenberg
Herbalife, whose stock tumbled last week after hedge fund manager David Einhorn asked a few questions on the company’s earnings call, is no stranger to controversy.
The company first hit my radarin March after CEO Michael Johnson said on Jim Cramer’s Mad Money that Herbalife does research “around the clock.” Yet in its 10-K, the company discloses that its research spending is “not material.”
Best known for its weight-loss shakes, Herbalife likes to bill itself on its website as a “global nutrition company.” But it’s really in the business of multi-level marketing — or as it calls itself: “A global network marketing company that sells weight management, nutritional supplement, energy, sports & fitness products and personal care products.”
And not just any multi-level marketer, but “we are one of the largest network marketing companies in the world.”
By its nature, the centerpiece of the network marketing model is to recruit salespeople whose primary goal is to recruit other salespeople. “We are committed to providing our distributors with unique, innovative products to help them increase retail sales and recruit new distributors,” the company says in its 10-K. The ultimate goal, if all goes right, is to share in the profits of others up and down the line — or in the “upline” and “downline,” as they call it.
While the company says in its 10-K most distributors who take advantage of Herbalife’s “business opportunity” experience a high “turnover rate,” the formula has been a winner for the company and its shareholders.
Last year revenue surged more than 26 percent to $3.5 billion. And before its recent plunge, its stock had more than tripled in two years; even with the slide it has more than doubled.
The business has done so well that, as I reported last week, Johnson is among the highest paid CEOs in the country, with annual compensation last year of nearly $90 million, according to GMI Ratings.
But there are reasons for investors to worry.