Herbalife Falls on New Charges by Ackman, Nu Skin View Cut
Shares of Herbalife Ltd.HLF tumbled 7.4% on Wednesday after activist investor William Bill Ackman, hedge fund manager of Pershing Square Capital Management, renewed his attacks on the nutrition company. The decline was also the result of one of Herbalife's peers slashing its sales guidance due to industry concerns.
Ackman reportedly stated at the Bloomberg Markets Most Influential Summit in New York that he has some more evidence of Herbalife being a pyramid scheme business model.
Herbalife has been the target of Ackman since Dec 2012 when he launched his $1 billion short position in its shares. Since then Ackman has been trying every means to prove that the company was running a pyramid scheme business model, in which its profits are largely derived from recruiting new distributors and not from selling products. He also went public with his attacks on business television, in public settings and on his own website. Ackman also called on regulators to shut down the company. Various regulatory agencies have started probes into his allegations.
Last month too, Ackman had issued a press release stating that there are structural similarities between Herbalife and privately-owned Vemma Nutrition Company, which was shut down by the Federal Trade Commission in late-August. Vemme, a multi-level marketing company sold energy drinks, nutritional beverages and other weight management products and was accused of operating as an illegal pyramid scheme. As a result, the Federal Trade Commission had a federal court halt and froze Arizona-based Vemma's assets.
Herbalife, on its part, has been denying the charges since 2012 and has full confidence in its business model. In the recent months, Herbalife has strengthened its own public campaign against Ackman, prodding regulators to investigate Ackman's business practices.
However, repeated allegations by Ackman do impact the company's reputation and share price.
Besides Ackman, Herbalife's shares were impacted by the forecast of Nu Skin Enterprises Inc. NUS , another multi-level marketing company. Recently, Nu Skin lowered its sales outlook for the third quarter, citing currency headwinds and slower-than-expected sales of cosmetic oils in China. We note that Nu Skin and Herbalife have structural similarities and have significant business in China. The news thus led to a drop in Herbalife's share price. Shares of Nu Skin fell 26%.
Herbalife holds a Zacks Rank #2 (Buy). Herbalife is not the only company, which employs sales representatives to sell its products. Other multi-level marketing companies like USANA Health Sciences Inc. USNA and Avon Products Inc. AVP also follow the same model.
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