QUOTE AND NEWS
Motley Fool  8 hrs ago  Comment 
This battleground stock could be sinking fast in the year to come.
Clusterstock  Dec 17  Comment 
BOSTON (Reuters) - A top Herbalife salesman said that most people who sell the company's weight loss and nutrition products are doomed to fail, adding fresh grist to accusations by a hedge fund manager that the company is a fraud. "We sell people...
Benzinga  Dec 17  Comment 
Bill Ackman, activist investor and CEO of Pershing Square Capital Management, spoke on Bloomberg TV this morning about one of his fund's most controversial positions: a $1 billion short sale of Herbalife Ltd (NYSE: HLF). So far, 2014 has been...
MarketWatch  Dec 17  Comment 
Shares in Herbalife were last down 3% Wednesday after another salvo from Pershing Square hedge fund billionaire and avowed Herbalife foe Bill Ackman. "I think this will be a 2015 event -- the implosion of the company," Ackman said in an interview...
Wall Street Journal  Dec 16  Comment 
The SEC dropped the insider-trading case of a man who had been accused of profiting from a tip that a hedge fund was about to launch an attack on Herbalife Ltd. shares.
New York Times  Dec 15  Comment 
The Securities and Exchange Commission said it would not be able to proceed with the lawsuit because the two main witnesses it intended to call to testify are in Poland and had no plans to return to the United States.




 

Herbalife (NYSE: HLF) sells weight management, nutritional supplements, energy and fitness, and personal care products through a network of 2 million independent distributors in 72 countries. In 2007, the company marketed and sold a portfolio of 127 products.[1] The company earned $2.3 billion in revenue and $203 million in net income in 2009.[2]

Herbalife is one of the largest network marketing companies in the world, and as such markets its products through relationship referral and direct selling. That is, independent distributors buy Herbalife products at wholesale prices and then sell them at retail prices. Distributors are motivated through royalties, a performance-based compensation plan, bonuses, and other incentives from the company. Additionally, Herbalife provides its distributors with educational training materials to help them increase their sales and to recruit additional distributors. The company also holds international Company sponsored sales events.

Herbalife stands to benefit from the obesity epidemic -- studies estimate that the number of overweight and obese people is around 1.6 billion -- with its Formula 1 product, which accounts for 32% of the company's sales.[3] However the company also faces foreign currency risks because it does a substantial portion of its business abroad. In 2009, the company suffered a $155 million loss in revenue to do foreign currency exchange.[2]

Company Overview

Business Financials

Out of Herbalife's 2 million distributors, 481,000 are considered sales leaders and account for almost the entirely of the company's sales. Of the remaining distributors, 47% are considered discount buyers, meaning that they buy Herbalife products at a wholesale price but do not market it to others. 36% are considered small retailers and 17% are considered potential supervisors.[4]

Business Segments[3]

The company is divided into five segments: Weight Management, Targeted Nutrition, Energy and Fitness, Outer Nutrition, and Literature & Promotional Products.

  • Weight Management (63% of net sales): The Weight Management segment, which accounted for almost two-thirds of the company's sales, sells meal replacement shakes, weight loss enhancers, appetite suppressors, and snacks. Its products include Formula 1 Healthy Meal, Personalized Protein Powder, Total Control, and High Protein Bars. Formula 1 is Herbalife's best-selling product and accounts for 32% of its sales.
  • Targeted Nutrition (21.2% of net sales): Targeted Nutrition sells dietary supplements, which contain herbs, minerals, vitamins, and natural ingredients. Products include Niteworks, Garden 7, and Best Defense.
  • Energy, Sports & Fitness(4.3% of net sales): The Energy, Sports & Fitness segments markets energy and isotonic drinks such as Liftoff Energy Drink and H3O Hydration Drink.
  • Outer Nutrition (5.5% of net sales): Outer Nutrition markets skin cleansers, moisturizers, shampoos and conditioners, and lotions with antioxidants and other products that help users maintain and improve the appearance of their body and hair.
  • Literature & Promotional Products (6% of net sales): The company sells CD's, audiotapes, DVD's, and other materials to help its distributors market products. Start-up kits called "International Business Packs" are available for new distributors.

Geographic Segments[5]

The top six countries worldwide account for nearly 60% of the company's net sales. Herbalife divides its geographic sales into six different segments:

  • North America - 22.8% of net sales
  • Mexico - 11.3% of net sales
  • South and Central America - 15.8% of net sales
  • EMEA - 21.7% of net sales
  • Asia Pacific - 21.9% of net sales
  • China - 6.5% of net sales

Business Growth

FY 2009 (ended December 31, 2009)[2]

  • Net sales fell 1.5% to $2.32 billion. The company attributes the loss to the negative impact of currency fluctuations of $155.6 million. Without the impact, net sales increased 5.1%.
  • Despite 27% growth in sales leaders in Asia Pacific, all the other geographic segments had double digit declines in the number of sales leaders.
  • Net income decreased 8% to $203 million.

Trends and Forces

The Obesity Epidemic Will Increases Demand for Herbalife's Products

The obesity trend in the United States and the world at large has greatly expanded the weight loss industry as a whole. Worldwide, it is estimated that the number of overweight and obese people is around 1.6 billion. According to the Marketdata Enterprises, 68% of Americans over the age of 19 are considered overweight of which half are considered obese. As a result, the weight management industry generates $59 billion in revenue annually in the US alone.[6] Since Herbalife's best-selling product, Formula 1, is intended to help consumers lose weight, the company stands to benefit from the worldwide obesity epidemic and if consumers become more aware of the negative health-related aspects of obesity. Formula 1 accounts for 32% of the company's sales.[3]

Fluctuations in Foreign Currency Exchange Rates Increase Revenues from Foreign Countries

Since 80% of Herbalife's revenue is generated from its sales in foreign countries, the company is exposed to the ups and downs of the foreign currency market. When the US dollar is weak, each sale in foreign currency (like the Euro or Yen) can be converted into more dollars, thus boosting Herbalife's revenue total. However, the opposite is also true -- when the dollar is strong, Euros and Yen are traded in for fewer dollars, thus negatively impacting the company's sales figure. In 2009, Herbalife suffered from a $155.6 million loss due to foreign currency exchange.[2]

Litigation Threats Leads to Increased Uncertainty

Because Herbalife's distributors are contractors rather than employees, Herbalife believes that they are more liable to act in a manner that is inconsistent with the company's own policies. A court could hold Herbalife liable for violations of its distributors. Additionally, many countries have regulations regarding "Pyramid" or "Chain Sale" schemes. Though Herbalife is a network marketing company, the boundary between network marketing and these illegal schemes is often unclear. No action has yet been taken by the Chinese government.

The Difficulty of Obtaining Business Licenses Leads to Increased Uncertainty

Because China heavily regulates direct selling and forbids pyramidal promotional scheme, Herbalife operates retail stores and sells its product through employed sales management personnel, a business model different from that which it uses in the rest of the world. Herbalife has stated that applying for direct selling licenses is expensive and cumbersome. Sales in China account for 6.5% of the company's net sales.[5]

Competition

Because the company's Formula 1 accounts for 32% of its net sales,[3] Herbalife faces competition in the weight-loss industry. Thus, almost any company that a customer could turn to to help him or her lose weight is a potential substitute for Herbalife.

  • Alticor Inc is a network marketing company that sells a wide variety of goods, one of which is nutrilite dietary supplements.
  • Weight Watchers International (WTW) provides its customers with a diet program and regular support meetings during which customers discuss their program. Herbalife is similar in that many of its Formula 1 customers meet at the distributor to provide each other with weight-loss advice.
  • Ediets.com does not market nutritional supplements or weight-loss products, but operates a website which sells customers subscriptions to weight-loss plans.
  • Nu Skin Enterprises (NUS) is a direct selling company that markets nutritional supplements.
  • General Nutrition Centers sells nutrition related products throughout the US and 49 countries in the world.
  • Shaklee Corporation is a network marketing company that sells environmentally friendly nutritional supplements, among other products.
  • Nature's Sunshine Products (NATR) has a network marketing system and that manufactures and markets herbs, vitamins, minerals, remedies, and other products.

References

  1. HLF 2009 10-K "General" pg. 4-8
  2. 2.0 2.1 2.2 2.3 HLF 2009 10-K "Selected Financial Data" pg. 49
  3. 3.0 3.1 3.2 3.3 HLF 2009 10-K "Product Overview" pg. 8-10
  4. HLF 2009 10-K "Customer Base" pg. 5
  5. 5.0 5.1 HLF 2009 10-K "Geographic" pg. 16
  6. 2009 WTW 2009 10-K "The Global Weight Management Market" pg. 1-2
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