Thursday, August 2, 2018

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,

June 30,

% Change

June 30,

June 30,

% Change

(Volume Points in millions)

North America












South & Central America(2)












Asia Pacific



















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. 


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


Anonymous said...

Presumably you mean the product is UPS direct from Herbalife to the identified ultimate *consumer* (not distributor)?

Unknown said...

Intrinsci value keeps going up as the company executes its growth initiatives, takes price, and distances itself from the post -Ackman era. Multiple expansion.

HZ said...

In the back of your mind - don’t you think the world would be a better place without Herbalife?

Don’t you think USNA NUS HLF etc all out-of-business would be beneficial to the population?

You’re just looking at the EPS. You’ve been to a couple spots. So what? The people overpay for shakes. Great. The owners do OK. Nice job.

Remove the short sellers. Remove the FTC. It’s all a big circle with the main benefactor being the shareholder of a bad actor. Do you REALLY think Michael Johnson set out to provide a product to enable any good. He’s the scum of the earth. I mean mr hemtpon you know he’s one of the worst people on the planet.

It seems you too have become too caught up in the story of the “regulatory problems are behind us,” and “people can identify real consumers of their product!”

“Multiple expansion”

Hopefully these all die one day.

John Hempton said...

In the back of my mind I think the world would be better without Nuskin, Usana, Amway.

Herbalife is different. It sells a product that is worthwhile and best sold via community support.

I am proud to own it.

Anonymous said...

Good day mate. Have you taken a look at one of HLF peers , MED? Looks quite dodgy compared to HLF. There’s been a recent dossier about it. Seems perfectly in your circle of competence.

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