Download - Herbalife Ltd
HERBALIFE LTD.NYSE:HLF
SELLBy Peter Ostrowski
COMPANY DESCRIPTION
• Herbalife Ltd. is a global nutrition company that sells weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products as well as personal care products. The Company distributes and sells its products through a network of independent distributors, using the direct selling channel.
THESIS POINTS
• Constant legal troubles leave future of uncertainty • Back to back years of negative retained earnings leave company with
103.4% debt and -3.4% equity• Credit facility requires HFL to comply with strict contingencies; hindering key
value drivers• Business plan cannot sustain long term growth
NATURE OF BUSINESS
• Target Low Income/Unemployed• Expand globally into world’s poorest countries• Recruit distributors to invest in product for above market price goods• Encourage distributors to recruit friends/family to invest
EARNINGS ESTIMATES
CAPITAL STRUCTURE
SHORT SELLERS
• Bill Ackman-Pershing Square Capital• David Einhorn
DIRECT QUOTE FROM HERBALIFE
• “for those who devote the time and energy to develop a stable base of customers and then mentor and train others to do the same, the opportunity for personal growth and an attractive part time or full time income exists. “
LEGAL TROUBLE • Tax reporting issues
• Mexican Tax Administration ($66m-company has not recognized losses) multiple cases
• Federal Revenue Office of Brazil- $2M no recognized loss• Indian VAT
• FTC- Civil investigative demand “At the present time, the Company is unable to estimate a range of potential loss, if any, relating to these matters. “
• Securities Litigation- Judgment is final and 3rd amended complaint was dismissed regarding Ponzi scheme
Herbalife used non-market exchange rates in Venezuela and reported actual exchange rates. Artificially increased earnings
Expenses incurred responding to attacks
Expenses related to FTC’s Investigation
LITIGATION QUOTES FROM 10-K
• “The Company is from time to time engaged in routine litigation. The Company regularly reviews all pending litigation matters in which it is involved and establishes reserves deemed appropriate by management for these litigation matters when a probable loss estimate can be made.”
• “While the Company believes it has meritorious defenses, it cannot be sure of their ultimate resolution.”
NETWORK MARKETING ISSUES
• “Ponzi Scheme” Herbalife distributors "primarily obtain their monetary benefits from recruitment rather than the sale of goods and services to consumers."
• Estimates suggest Herbalife has led to more than $3.5B net losses to bottom of chain
• Chance of making $100 is less than 1%• “Pop and Drop”- cannot sustain Earth’s population
VEMMA
• Also used multilevel marketing• Targeted college kids and young adults• Used energy drinks to cover pyramid scheme• Raided by FTC in August, 2015, • “Rather than focusing on selling products, Vemma uses false promises of
high income potential to convince consumers to pay money to join their organization,” Jessica Rich, director of the FTC’s Bureau of Consumer Protection
BURNLOUNGE
• Multilevel marketing• Online music store that used recruitment to drive sales• FTC ruled it was a Ponzi scheme in 2012 after a 5 year process• Burnlounge lost appeal in 2014 and was forced to pay $1.9m back to people
who lost money
HIGHLY CONCENTRATED MARKET
• Product competitors include Jenny Craig, Weight Watchers, Medifast, nutrisystem
• Sales are largely driven by recruitment so comparison is difficult• “Ingredients are not listed on website”• Expensive products, poor taste and minimal information on success rate
INCREASING INTEREST RATES
• • “After March 9, 2016, the applicable interest rates on the Company’s borrowings under the Credit Facility will increase by 2.00% such that borrowings under the Credit Facility will bear interest at either LIBOR plus the applicable margin between 4.00% and 5.00% or the base rate plus the applicable margin between 3.00% and 4.00%. The Company incurred approximately $6.2 million of debt issuance costs in connection with the amendment. The debt issuance costs are recorded as deferred financing costs on the Company’s condensed consolidated balance sheet and will be amortized over the life of the revolving credit facility.”
CONTINGENCIES
• Required to keep a minimum cash balance of $200m• Restricts dividends and stock repurchase to $233m until maturity
• For ever 1 dollar repurchased or paid in dividends borrowing capacity is decreased by $2
• “including covenants that limit or restrict the Company’s ability to incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments”
ACTUAL LIQUIDITY
• Cash=889.8M-200M=689.8M• Reported Quick Ratio=0.9• Calculated=(689.8+69.9)/1024=.74