Herbalife Says It’s Not a ‘Pyramid Scheme;’ Claims Hit Stock Hard

herbalife Herbalife Says Its Not a Pyramid Scheme; Claims Hit Stock HardBill Ackman, the hedge fund manager known for taking strong positions in hopes of pushing for management changes, took on weight-management company Herbalife Ltd. today for his end-of-the-year short. Ackman called Herbalife a “pyramid scheme” in a presentation entitled “How to be a millionaire,” just one day after confirming his Pershing Square Capital Management was shorting the stock.

Herbalife’s business strategy is based on selling its weight management and nutritional supplements through a distribution channel involving 2.7 million sponsors in 81 nations. The distributors make money not only from their own product sales to customers, but also from sales to others they sponsor and bring into the business.

Ackman spoke before an audience of 500 today, explaining his belief that Herbalife has “grown remarkably rapidly” without demonstrating “much substance” to justify the growth. He said the company inflated its products’ suggested retail price and overstated its retail sales in public filings.

 

After Ackman’s hedge fund shorted Herbalife stock Wednesday, shares in the company fell 12 percent. They tumbled more than 10 percent today, hitting just $33.52 in late afternoon trading.

Ackman is not the first to question Herbalife’s business model, although he is the first hedge fund manager to short the company’s shares.

Earlier this year David Einhorn, another notable investor, spoke to Herbalife executives on a conference call and asked pointed questions about the percentage of sales to consumers who are not official distributors. It is the overwhelming percentage of sales to distributors that brings about the pyramid scheme accusation, as companies such as Mary Kay and Avon make most of their profits from consumer product sales.

Herbalife chief executive Michael Johns responded to Ackman’s accusation Wednesday, however, calling his claims “bogus,” and criticizing Ackman for making a public attack against Herbalife to benefit his own “business model.

[Image via Herbalife]

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