Battle over Herbalife takes to New York streets

On the eve of Herbalife's most anticipated quarterly earnings report in recent memory, a heated public debate over the nutrition supplement company's approach to Latino salespeople took to the streets of Manhattan.

Late Thursday morning in front of 767 Fifth Ave., the east midtown office of the hedge fund activist and prominent Herbalife investor Carl Icahn, a group of eight or so anti-Herbalife protesters gathered for a prayer vigil to oppose Icahn's support of the stock.

The protesters, who had been organized by two Chicago-area members of the League of United Latin American Citizens, known as LULAC, were urging Icahn to sell his stock in Herbalife as a stand against what they describe as fraudulent practices at the company that have damaged some of its salespeople of Latino origin.

Hey had signs saying, "Out with Herbalies" and a logo of the company with a red slash through it.

But the demonstrators found themselves outnumbered by a larger group of some two dozen Herbalife supporters who, carrying buttons that said "Yo (with the "o" as a heart symbol) Herbalife," or "I love Herbalife," and signs that said, "Yo Soy Herbalife," or "I am Herbalife," surrounded them in a circular march in support of the company.

The dueling demonstrations were part and parcel of what has become an increasingly rancorous standoff between critics of Herbalife, the multilevel marketer whose products and sales roles have been popular in the Latino community in the U.S. and abroad, and its backers.

An independent distributor packs bags of products at the Herbalife distribution center in Carson, California.
Patrick T. Fallon | Bloomberg | Getty Images
An independent distributor packs bags of products at the Herbalife distribution center in Carson, California.

The skeptics, a group spearheaded by the hedge fund activist Bill Ackman, who based his famous $1 billion short bet on the stock on an argument that Herbalife is a pyramid scheme, say that Herbalife hurts vulnerable people—in many cases, Latinos—by promising big payouts that are elusive if not impossible given the way the company and its sales clubs operate.

Supporters, including some senior Latino community advocates, say that Herbalife has provided its salespeople with economic opportunity and health benefits.

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"We do not believe the attacks against Herbalife being made by Wall Street investors and allied organizations. We believe Herbalife does good things for our community and is providing solutions to the health and nutrition challenges facing Latinos," said Francesca Peña, president of the Dominican American National Roundtable, in a press statement Thursday.

The Federal Trade Commission and other regulators have launched investigations into Herbalife's practices, but it is not yet clear whether there have been findings of wrongdoing. None may ultimately emerge.

Nevertheless, the nutritional supplement maker's shares have taken a beating in the past year as a combination of business headwinds and attacks by Ackman have continued, leaving the stock down more than 50 percent from a year ago. Early afternoon Thursday, shortly after the kerfuffle in midtown and a few hours before fourth-quarter earnings were to be reported, the shares reversed and were up about 1.5 percent.

Citing a combination of foreign currency prices, including a stronger dollar and issues in key sales regions like Venezuela, Herbalife in early November predicted fourth-quarter earnings of between $1.30 and $1.40 per share. The company beat that, posting adjusted earnings per share of $1.41 on revenue of $1.13 billion.

The report handily bested analysts' expectations of $1.22 in earnings.

Herbalife's forward guidance has been "likely too optimistic," wrote Timothy Ramey, a stock analyst that covers the company for Pivotal Research Group, in a recent research note. Factors like its "Gold Standard" initiatives, which among other things would depress product sales in the short term as it incentivized sales supervisors to pursue promotions over a longer period of time, would create headwinds in 2015, but would be "quite positive in the medium term," Ramey wrote.

In the absence of a damaging FTC finding—an outcome Ramey wrote he regarded as "very unlikely"—Herbalife shares, on a current price-to-earnings basis, are very cheap.

A number of prominent hedge fund managers appear to be taking note of that.

Between the third and fourth quarters, for instance, Soros Fund Management, the family office founded by George Soros, dramatically raised its Herbalife stake to 3.4 million shares (Thursday's protesters had initially planned to travel to Soros' office building after completing their demonstration at Icahn's.)

Icahn holds 17 million shares, and other blue-chip money management firms are top holders, too. (A spokesman for Soros said on Wednesday that he hadn't received a copy of the protest organizers' letter, and Icahn didn't respond to a request for comment.)

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For the moment, however, Herbalife continues to battle the accusations levied by Ackman and other critics—which are creating additional conflicts of their own. Thursday's original gathering, for instance, was organized in part by Julie Contreras, a member of the LULAC chapter in Lake County, Illinois, and anti-Herbalife activist who recently invited Ackman to speak out about the company at a gathering in Chicago, according to a letter from her obtained by the New York Post.

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However, a letter from LULAC officials in New York and the Northeast to the Post's editor, dated Feb. 24, attempted to distance the national LULAC organization from the planned efforts in midtown Manhattan, as did an ad that ran in the paper Thursday.

The Thursday vigil scheduled on Fifth Avenue "is not sanctioned by the national organization of the League of United Latin American Citizens or New York State LULAC or any of its local councils, as your journalist infers in her article in your paper," wrote the LULAC regional officials in both the letter and the ad.

Ackman did not respond to requests for comment on whether he was involved in planning Thursday's protest, and a spokesman for Herbalife did not respond to requests for comment on whether the company had a role in organizing the counterprotest.

With additional reporting by Lawrence Delevingne.