A quick comment on the Herbalife results

Herbalife reported after market.

There was a lot of noise. Margins in various markets fell. There is the usual Herbalife currency noise. 

But lets cut through all of that.

I don't particularly care in this case whether you believe that Herbalife is a scheme that rips people off on their sales or whether you believe (as I do) that Herbalife is a network whereby weight loss products are sold via community support.

At the end of the day profits will eventually follow the volumes of product they sell.

If they are crooked profits will follow volumes.

If Herbalife is (as I argue) a true social support network profits will still eventually follow volumes.

Herbalife has for as long as I know used a consistent measure of volume - the volume point. This is not an arbitrary measure of volume. It is the mechanism by which distributors are paid and which real cash moves. 

With a single exception this quarter and only in a trial way in Brazil and Mexico a volume point has an unchanged meaning for the last decade.  For example a small tin of Formula 1, their main product and the largest selling diet shake in the world, is 23.95 volume points. It has been 23.95 volume points unchanged for decades.

The price of the product changes, but the number of volume points does not change. Changes in volume points are real changes. When volume points fell as the company implemented the changes demanded by the Federal Trade Commission those were real falls in volume.

And when volumes rose this quarter they were also real changes in volume. If they increase price revenue will grow even faster. 

Here is the volume points by sector this quarter versus the previous corresponding quarter.

	Three Months Ended												Six Months Ended
		June 30, 2018				June 30, 2017				% Change				June 30, 2018				June 30, 2017				% Change
		(Volume Points in millions)
North America			336.4				284.1				18.4	%			639.6				586.7				9.0	%
Mexico(1)			237.1				228.9				3.6	%			458.9				454.4				1.0	%
South & Central America(2)			136.3				137.5				(0.9	)%			284.8				290.7				(2.0	)%
EMEA			319.5				283.6				12.7	%			614.2				557.8				10.1	%
Asia Pacific			302.8				275.9				9.7	%			589.4				536.7				9.8	%
China			196.1				153.9				27.4	%			337.2				335.9				0.4	%
Worldwide(3)			1,528.2				1,363.9				12.0	%			2,924.1				2,762.2				5.9	%

You see the highlighted things right. Volume points rose 12.7 percent this month in Europe, Middle East and Africa, 18.4 percent in North America and 27.4 percent in China.

This is an acceleration in growth. 

Now there are a couple of anomalies here. Firstly the United States (by far the bulk of the the North America segment) is lapping the particularly bad quarter when the company implemented the reforms the Federal Trade Commission demanded. China is lapping a strange quarter. Herbalife raised prices in March 2017 and volume points were particularly high in the first quarter of 2017 and low in the second quarter as customers bought purchases forward to beat the price rise.

But even without these anomalies Herbalife volume growth accelerated. A lot.

Now I say this because even if you believe Bill Ackman's thesis it is not a good stock to be short. Earnings growth is coming. And regulatory problems have passed.

--

But for a true Herbalife bull these results are even sweeter. 

Herbalife was made to change its operating rules in North America by the Federal Trade Commission. These rule changes ensure that Herbalife distributors can identify ultimate and real consumers for their product. Mostly the product is UPS direct from Herbalife to the identified ultimate distributor. Alternatively you go into a club and your name is taken. 

If the Bill Ackman case were correct (even in any substantial part) this would mean that Herbalife sales would collapse because Mr Ackman argued there were no ultimate customers and inability to identify them would make sales go away.

There was comment after comment from short-sellers arguing this and noting this quarter was going to be even harder as certain changes had to be fully implemented this quarter.

18.4 percent growth and record volumes in North America confirm what I knew - the vast bulk of Herbalife's sales are legitimate sales of diet products sold with community support networks to help people stick to their diet.

Herbalife remains an ethical company selling a product for which there is a real need.

And now it is a growth stock to boot - with very high incremental returns and a PE way below the market average.

All aboard. 




John

PS. My long post - the detailed background to the Herbalife story - is standing the test of time.