Second-guessing Ackman’s $HLF Herbalife short

Wednesday, Dec 19 2012 by

I just heard that Ackman has shorted $HLF (Herbalife) – a company that I hadn’t heard about until today. He will publish his short thesis tomorrow, So, since I’m such an Ackman fan (OK, Bill Ackman is my God), I thought I’d take a crack at his short thesis. Remember, it’s a reading from pure cold over the course of half an hour. I am an amateur. If I am even remotely close to what Ackman is thinking, I award myself one point.

Herbalife Ltd. is a global network marketing company that sells weight management, nutritional supplements, energy, sports and fitness products and personal care products through a network of approximately 2.7 million independent distributors, except in China, where the Company sells its products through retail stores.

The company has gross profit margins of 80% – higher than MSFT (Microsoft). Just how is this possible? If something seems to be too good to be true, then it probably is.

HLF seems to sell its products through distributors -think Amway. Typing amway and herbalife into Google reveals the second hit as “Corporate Frauds Watch: Herbalife, Amway are like twins out to cheat people”. Oh. So, they sell overpriced goods to a distributor, who then has to try to sell them on. The site elaborates:

If you are lured by the commission, then the trap is ready. You will realise only later after purchasing products worth Rs. one hundred thousand or more that it is virtually impossible to sell these products. By that time it would be too late. Now you start advertising in the same way to attract people’s attention.

This is a game that can only be played for so long. As you “burn through” your distributors, you exhaust the demand for your product. It’s not repeat business: you cannot sell to someone who already has more inventory than they could possibly sell themselves.

You can see signs of the business model becoming more-and-more saturated if you look at inventory turnover (turnover divided by inventory). For 2008, inventory turnover was 17.6, and declined monotonically to 13.9 for 2011. It is more worrying when you look at the quarterly trends. For 3 m/e 30-Sep-2011, inventory turnover was 4.03. A year later, 3 m/e 30-Sep-2012, inventory turnover had reduced significantly to 3.25

I’m sure Ackman’s thesis will be far more thorough.

Unlock this article instantly by logging into your account

Don’t have an account? Register for free and we’ll get out your way


As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.

Do you like this Post?
0 thumbs up
0 thumbs down
Share this post with friends

What's your view on this article? Log In to Comment Now

You can track all @StockoChat comments via Twitter

About Mark Carter

Mark Carter

I am a private investor living in Scotland. I am a computer programmer by trade.


Stock Picking Tutorial Centre

Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis