Herbalife Fires Back at Ackman, Hedge Fund Battle of MLM Company Continues to Heat Up

Following Bill Ackman's extremely publicized short presentation of Herbalife HLF on December 20th, the company convened analysts and industry experts Thursday morning to rebut Ackman's attack against the company. To recap: Ackman publicized a massive short position the he stated is close to 20 percent of the current float on the market. The short was supported by a meticulous three-hour presentation detailing his thesis that the company was a pyramid scheme and would be eventually taken down by the FTC. The presentation also alleged a targeting of non-developed markets, low income individuals as distributors, and run-down “nutrition clubs” in highly undesirable areas. 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 where 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”. This was just the start- at 9:00 am Eastern standard time, the real fireworks started: the live webcast of Herbalife's investor presentation. The presentation was lead off by the company's CEO Michael Johnson who opened remarks by stating how proud they were of the company they had built, that there were many misconceptions, exactly what was expected. Johnson was followed by the company's COO Richard Goudis who 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 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 .(which may seem fishy to some) He continued his presentation by outlining the $44 million dollar budget allocated to quality control, and his absolutely authority to “hit the stop button” on any product that does not meet the correct standards. Michael Johnson then took over once more, and began to attack the strongest accusation against the company: that it was a pyramid scheme. He 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, opposite of what Ackman has claimed. Overall the presentation seems to have been fairly successful, following its completion the stock rested above $40, but the gains were quickly lost as Ackman released a letter refuting the claims in the Herbalife presentation later in the day.