Herbalife Falls on Database Error, Distorts Membership Growth

Shares of Herbalife Ltd. HLF lost 7.02% on Mar 3 after the dietary supplement maker announced in a Securities and Exchange Commission ("SEC") filing that it is currently under federal investigation for overstating its worldwide membership growth in 2015.

The company admitted that there was a major discrepancy in active new members in 2015. Instead of the 16.7% growth revealed on the fourth-quarter 2015 conference call, announced on Feb 25, the company admitted to a 3.2% rise in active new members. Further, U.S. active members increased 30.7% and not the 71% mentioned in the earnings release. The Los Angeles-based company cited database error as the reason for the misrepresentation.

Though these errors will not impact the company's financial statements, many law firms have issued lawsuits against the company.

The accusations are ill-timed as the company is already smarting under pressure from activist investor Bill Ackman and his Pershing Square Capital Management LP. Ackman made a $1 billion bet against the company in Dec 2012, questioning its business practices. He claimed that the company is running a pyramid scheme, which involves making money by way of recruiting more salespeople rather than selling products. Such models are illegal because they eventually collapse once there are no more people to recruit.

Herbalife, on its part, has been denying the charges from the very beginning, having full confidence in its business model. The company clarified that it operates like a multi-level marketing company similar to Nu Skin Enterprises Inc. NUS, USANA Health Sciences Inc. USNA and Avon Products Inc. AVP.

In fact, the company disclosed in February that it is in talks to with the Federal Trade Commission to potentially resolve the investigation surrounding its business practices.

Herbalife also reported better-than-expected fourth-quarter 2015 results on the back of higher sales in China and improving volume trends. Adjusted earnings, however, declined 15.6% year over year due to currency headwinds, as a major portion of its business is spread overseas. Net sales of $1.098 billion declined 3.1% from the prior-year period due to currency headwinds.

Herbalife carries a Zacks Rank #3 (Hold).

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