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Herbalife Ltd. Message Board

  • fastmoneypete fastmoneypete May 10, 2012 12:12 PM Flag

    The case for David Einhorn

    Sales leaders account for virtually all sales growth. Here is the table of sales leaders by percentage of the total distributor base per year:
    2007: 22%
    2008: 20%
    2009: 17%
    2010: 14%
    2011: 12% (as disclosed by HLF mgt only after Einhorn's remarks)

    Now, from page 5 the 2010 annual report: Read the last sentence(IMPORTANT)
    Distributor Base
    As of December 31, 2010, we had approximately 2.1 million distributors, which includes approximately
    161,000 China sales representatives and employees. Collectively, we refer to this group as “distributors.”
    Approximately 483,000 of our 2.1 million distributors have become sales leaders, which are comprised of
    approximately 434,000 sales leaders in the 73 countries where we use our traditional marketing plan and
    approximately 49,000 China sales employees and licensed business providers operating under our China marketing
    plan. Collectively, we refer to this group as “sales leaders.”We believe that the distributors who have not attained the
    sales leader level can be segmented into three general categories based on their product order patterns: discount
    buyers, small retailers and potential sales leaders. We define discount buyers as customers who have signed up as
    distributors to enjoy a discount on their purchases; small retailers as product users and sales people who generate
    modest sales to friends and family; and potential sales leaders as distributors who are proactively developing a
    business with the intention of qualifying to become a sales leader. In 2010, excluding China, distributor orders for
    these three general categories were approximately 29%, 57% and 14%, respectively. For the approximately 483,000
    sales leaders in our organization, the marketing plan encourages active participation in the business including
    building down-line sales organizations of their own, which can serve to increase their income and increase our
    product sales. Sales leaders contribute significantly to our sales.

    Then read page 26:
    We estimate that, of our approximately 2.1 million independent distributors, we had approximately 483,000
    sales leaders as of December 31, 2010. These sales leaders, together with their downline sales organizations,
    account for substantially all of our revenues. Our distributors, including our sales leaders, may voluntarily terminate
    their distributor agreements with us at any time. The loss of a group of leading sales leaders, together with their
    downline sales organizations, or the loss of a significant number of distributors for any reason, could negatively
    impact sales of our products, impair our ability to attract new distributors and harm our financial condition and
    operating results.

    So a breakdown of distributors by: "discount buyers", "small retailers", and "sales leaders" is material, based on prior year 10K's, which mysteriously disappeared on the 2011 10K. How can anyone "buy" the story from the CFO's response to Einhorn that those numbers are not broken out due to the CFO changeover and that he felt the "information was not important to shareholders"?????
    I've changed my outlook on HLF from positive to negative only for this reason, leaving out all of the other random speculation and innuendos disseminated by short sellers.

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    • And so what? They left that information out of the 10-K and was quickly released the next day? My question is simple... So What? This information you just it no public information? Was that classified information you got your hands on? No. It has been available to analysts and the SEC for how long now? Why has no one made a big deal about it? If this is all Einhorn has, then he doesnt' have much. If there is concern on what you posted, does that justify a $25 price reduction in the shares? If yes, then a lot more has to be released to justify a further push-down of share price.
      You can look at any 10-K and find things in their that will scare you away from buying a company. Have you looked at Facebook's recent release of their 10-K?

      • 1 Reply to thefrankster5
      • Percentages, as we know, can be tricky -- to put the numbers you cite in perspecitve, you need to know for each year the number of sales leaders and the number of total customers.
        If in 2007, the co had 2 sales leaders and a total of 4 customers, the company would have a 50% ratio (WOW!).
        If in 2012, they have 10,000,000 customers but only 1,200,000 sales leaders, their sales leader percentage woudl have precipitously dropped the 12% (PANIC!, SELL! Collapse is imminent!)
        The numbers are made up, but the principle is real.

    • "Sales leaders account for virtually all sales growth"

      Clearly this was the trend in 2007 and is less so now

      This shrinking % is actually very good news for the company longer term as opposed to supposedly bad...

    • An inverted way of reading these numbers is that the customer base is growing at a far greater rate than the sales leaders...And the customer base is expanding rapidly - further expanding the potential for even greater sales growth as customers eventually get recruited to become sales leaders..How can you explain the massive growth in sales as the sales leaders % of these sales declined??

      • 3 Replies to rematter
      • I want to believe that story too, and perhaps I did initially. However, the MLM business model relies primarily on the ability to produce sales leaders that will multiply the downstream lineage. So if the primary source of sales is now in the direct-to-consumer consumption base, sales growth is not sustainable. Consumers are buying the product and only to the extent of personal consumption. For Herbalife to sustain their current growth rate, the company would need to expand the "discount buyer" distributor base by 5x to equal one "sales leader".

      • Rematter....I agree. A decrease in sales leader percentage doesn't automatically indicate there is a problem especially since the numbers are saying otherwise. Only time will tell if those numbers translate in to decreasing sales and certainly doesn't justify a massive sell off as such we've seen here.

    • Yup. Another GMCR growth deceleration story in the works on the heels of the company keeping analysts giddy with pipe-dream growth targets.

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