Direct-selling nutritional brand needs an image makeover

Atlanta: Herbalife Ltd has an image problem on Wall Street. Ever since Greenlight Capital’s David Einhorn dialed into a May 1 earnings conference call asking for more disclosure, investors have shunned shares of the nutritional and weight-loss supplement maker.

The influential hedge-fund manager’s query hit right at Herbalife’s marketing Achilles heel: how to keep track of inventory when much of it is sold from thousands of distributors’ homes and car trunks. Einhorn had dredged up scepticism that has long plagued direct sellers from Avon Products to Tupperware Brands.

Herbalife executives say they thought they’d put such concerns behind them, especially since their products increasingly are sold in so-called nutrition clubs — shopfronts where customers can drop by to sample products and exchange weight-loss tips. These operate more like traditional retail stores, which are easier for investors to understand.

“There is enough insecurity in the direct-selling model that the stock reacted significantly with the questions Einhorn raised,” chief financial officer John DeSimone said in a telephone interview. “It’s an indication we need to do a better job of educating Wall Street as to how the model works.”

On the call, Einhorn asked why Herbalife stopped giving a breakdown of three groups of distributors it had previously provided. He also asked for an explanation of financial incentives given to supervisors who sign up new distributors. DeSimone, who told Einhorn he stopped providing the data because it didn’t seem valuable to investors, agreed on the call to resume the disclosures.

Plummeted

Investors weren’t assuaged. Herbalife plummeted 20 per cent the day of the call, on the way to its largest three-day decline since the shares began trading in December 2004. Herbalife has fallen 36 per cent to $45.04 (Dh165) since April 30. Before Einhorn’s query, Herbalife’s share price had hit an all-time high on April 23, spurred on by a 26 per cent sales surge in 2011.

Herbalife executives will try to reassure investors by demonstrating the benefits of nutrition clubs, DeSimone said.

That should help because “you can go into these nutrition clubs and see the sales channel and measure it,” said Scott Van Winkle, a Boston-based analyst with Canaccord Genuity.

The first nutrition clubs popped up in Mexico in 2003 in the homes of independent distributors, much like Tupperware parties. Soon, distributors were opening small shops to mix protein shakes and sell them one at a time. Latino migrants took the method to the US in 2006. It soon spread to Taiwan, Korea and Brazil. The most popular nutrition club products are a “Formula 1” protein shake, tea and an aloe drink.