High Turnover, Profitless Distributors Don't Bode Well for Herbalife (HLF) - Barron's
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Herbalife Ltd. (NYSE: HLF) shares are lower Monday amid a negative article out of Barron's over the weekend.
Barron's highlights how a program to get Latino women above the poverty-line by issuing microloans to start small businesses ended up in a boom of Herbalife offices in South Omaha, Nebraska, as well as New York City, NY. Despite the rapid onslaught, few of the offices remain and employees of the program -- named Grameen America -- say they tell the women not to start a Herbalife branch because its not a good business.
Amid the suggestion, Herbalife, which built its business on a multi-level-marketing structure was actually doing really well. Earnings doubled over the last five years as the stock price quadrupled.
However, questions raised by hedge fund titan David Einhorn -- of Greenlight Capital -- on a recent conference call sent shares plummeting as he was confused as to how Herbalife made money and what the payout structure was. Peer NuSkin (NYSE: NUS) also saw pressure from the comments by Einhorn. Investors will now be keeping attention on the Ira Sohn Conference on May 16th, where Einhorn is expected to say a few words.
Barron's also highlights some issues with Herbalife. The magazine noted how scouring Herbalife's financials led to the realization that only 10 percent of distributors make any profit. This means turnover is high, with Herbalife needing to replace over half its distributor base each year. As time progresses, the limited number of distributors and ever-increasing speed of information will leave Herbalife with a smaller and smaller pool of candidates to choose from.
In America, Herbalife is seeing growth only in Hispanic markets while NuSkin is seeing consolidation. Both are now turning to Asian markets for continued growth, where current exposure is limited.
But, investors should focus on the now and on Einhorn's questions. Basically, how much does Herbalife need to sell to consumers outside of its network in order to justify half of distributors' commission. Barron's came up with 80 percent, which is huge. Herbalife said it didn't have specific numbers on outside consumption.
Reflection continued sentiment, shares are down an additional 5 percent. Herbalife closed at $69.86 at the end of April, meaning about 40 percent has been wiped from Herbalife's market cap in just a few short weeks.
Barron's highlights how a program to get Latino women above the poverty-line by issuing microloans to start small businesses ended up in a boom of Herbalife offices in South Omaha, Nebraska, as well as New York City, NY. Despite the rapid onslaught, few of the offices remain and employees of the program -- named Grameen America -- say they tell the women not to start a Herbalife branch because its not a good business.
Amid the suggestion, Herbalife, which built its business on a multi-level-marketing structure was actually doing really well. Earnings doubled over the last five years as the stock price quadrupled.
However, questions raised by hedge fund titan David Einhorn -- of Greenlight Capital -- on a recent conference call sent shares plummeting as he was confused as to how Herbalife made money and what the payout structure was. Peer NuSkin (NYSE: NUS) also saw pressure from the comments by Einhorn. Investors will now be keeping attention on the Ira Sohn Conference on May 16th, where Einhorn is expected to say a few words.
Barron's also highlights some issues with Herbalife. The magazine noted how scouring Herbalife's financials led to the realization that only 10 percent of distributors make any profit. This means turnover is high, with Herbalife needing to replace over half its distributor base each year. As time progresses, the limited number of distributors and ever-increasing speed of information will leave Herbalife with a smaller and smaller pool of candidates to choose from.
In America, Herbalife is seeing growth only in Hispanic markets while NuSkin is seeing consolidation. Both are now turning to Asian markets for continued growth, where current exposure is limited.
But, investors should focus on the now and on Einhorn's questions. Basically, how much does Herbalife need to sell to consumers outside of its network in order to justify half of distributors' commission. Barron's came up with 80 percent, which is huge. Herbalife said it didn't have specific numbers on outside consumption.
Reflection continued sentiment, shares are down an additional 5 percent. Herbalife closed at $69.86 at the end of April, meaning about 40 percent has been wiped from Herbalife's market cap in just a few short weeks.
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