Shares of Herbalife Ltd (HLF) hit a 52-week low of $35.45 on Dec 17 after activist investor William Bill Ackman, hedge fund manager of Pershing Square, stated that he has evidence in the form of videos that back his allegations against Herbalife. Shares of Herbalife closed at $37.74 on Dec 17.
Per reports, in the video obtained yesterday, a top Herbalife salesman has stated that most people who sell the company's weight loss and nutrition products are doomed to fail. Another video dated Dec 11 states that some of Herbalife distributors have been making false and fraudulent claims about the health benefits of Herbalife products for many years such as these products help cure medical conditions such as asthma, diabetes, hypertension, bronchitis, migraines, arthritis, weight loss, cellulitis and high cholesterol.
Herbalife’s business practices have been criticized since Dec 2012, when Ackman first accused the company of making money by recruiting new sales people and not from its sales. Per Ackman, the company is running a pyramid scheme business model. i.e. it employs deceptive marketing practices for improving business. Ackman also unveiled a $1 billion short position in the company's shares in 2012. (Read: Herbalife Faces Another Ackman Attack). Herbalife, on its part, has been denying the charges since 2012 and has full confidence in its business model.
Ackman's back-to-back allegations have also prompted investigations by the Securities and Exchange Commission, Federal Trade Commission, Federal Bureau of Investigation and at least two state attorneys general. But so far none has taken action. However, these accusations have immensely impacted share prices, which tumbled nearly 50% year-to-date. We therefore remain unsure about the long-term prospects of this Zacks Rank #4 (Sell) company due to Ackman’s continuous attacks on Herbalife’s business model.
Herbalife is not the only company, which employs sales representatives to sell its products. Other multi-level marketing companies like Nu Skin Enterprises Inc. (NUS), USANA Health Sciences Inc. (USNA) and Avon Products Inc. (AVP) also follow the same distribution model.
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