Market Overview

Herbalife Fires Back at Pershing Square's Bill Ackman

Following Bill Ackman's extremely publicized short presentation of Herbalife (NYSE: HLF) on December 20, the company convened analysts and industry experts Thursday morning to present its rebuttal to Ackman's claims.

Ackman has a massive short position -- about 20 percent of the current float on the market. The short was supported by a meticulous three-hour presentation detailing his thesis: Herbalife is a pyramid scheme and could be taken down by the FTC. The presentation also alleged that the company takes advantage of jobless Americans, targeting them as distributors.

Following the announcement of Ackman's short, Herbalife's stock took a massive 64 percent plunge over the course of 12 days.

Herbalife's defense began in the early morning, before the analyst presentation, when its President Des Walsh appeared on CNBC's Squawkbox. He stated that Ackman's claims against the company were “a gross distortion of reality." He went on to defend the nutrition clubs that Ackman and Pershing Square had called into question, saying they were “not designed to attract retail customers."

During the presentation, Herbalife's COO, Richard Goudis attacked the notion that Herbalife is not a product company. He started by asserting that the company introduces, on average, 300 new SKU's a year, while underlining the company's heavy investment in Oracle (NASDAQ: ORCL) technology. Goudis' remarks were largely focused around the company's large R&D expenditures, attempting to show the company's devotion to product development.

Following Goudis was the company's Senior Vice President of product: Dr. Bill Frankos. Frankos dove into the company's extensive quality control practices, citing his past experience at the FDA regulating nutritional supplements and working with Herbalife from the other side of the table.

Franks outlined the $44 million dollar budget allocated to quality control, and his absolute authority to “hit the stop button” on any product that does not meet the correct standards.

CEO Michael Johnson then took over to attack the strongest accusation against the company: That Herbalife was a pyramid scheme.

Johnson started by demonstrating the company's marketing efforts in the LA area and sponsorship of the L.A. Galaxy, while stating that the public brand awareness is currently over 70 percent.

He followed his marketing outline by attacking the depiction of Herbalife nutrition clubs as "dumps."

The floor was yielded to a prepared video where nutrition club owners submitted pieces about their individual clubs. While the facilities looked run-down on the outside, they seemed to be filled with a moderate amount of people, yet peculiarly stocked with plastic lawn chairs and tables rather than more permanent fixtures in many cases. In the videos, the patrons all were very jubilant and expressive of their love for the Herbalife product.

After Johnson yielded the floor, Herbalife CFO John DeSimone took the stage, underlining his confidence in the company's financial reporting. He also stated that its promotional expenses were one eighth of what Ackman had claimed, going on to state that 73 percent of distributors were only eligible for product discounts and not recruitment pay to further dispel the pyramid scheme accusation.

Finally, and possibly most convincing, Dr. Anne Coughlan of Northwestern University's Kellogg School of Management stepped up to the stage. She laid out the attributes of a successful multi-level marketing (MLM) company, linking them closely to the activities of Herbalife. Following this, she highlighted the company's low entry cost for new distributors, and argued that distributor consumption of product was in fact end-user consumption, the opposite of what Ackman has claimed.

Shares of Herbalife had rallied earlier in the day, but traded into the red later in the session.

Posted-In: Bill Ackman Pershing SquareNews Hedge Funds Intraday Update Movers Trading Ideas General Best of Benzinga

 

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