Herbalife Ltd. is not relying on sales growth alone to substantiate its business model, but also is campaigning to counter the “incredible amount of money being thrown” at discrediting the nutritional and weight-loss product direct seller.

Executives with the marketer said April 29 that despite regulatory investigations spurred by activist investor Bill Ackman, Herbalife reported its 18th consecutive earnings period of record sales.

According to the Los Angeles firm’s April 28 fiscal 2014 first-quarter earnings statement, global sales increased 12.4% to $1.3 billion with growth in five of its six regions. The Asia-Pacific region slumped 10% to $280.5 million and volume slipped 4% during the January-March period as the firm focuses on retaining distributors in countries including India and South Korea.

CEO Michael Johnson directly addressed Ackman’s campaign against Herbalife by pointing out sales and distribution data counter Ackman’s assertion that little of the firm’s revenues comes from consumers who use its products and most comes from its network of independent distributors. Johnson referred to Ackman as “short seller,” not by his name.

Of the 7.9 million U.S. Herbalife product purchases in the first quarter, 87% were by consumers who are not distributors, Johnson said during the firm’s earnings call with analysts. “Our products are consumed and consumption is genuine and backed by real demand,” he said.

Additionally, the firm’s product-return rate in 2013 was a record low 0.2%, even though Herbalife allows former distributors to return unsold products for 100% refunds within 12 months of their exits and provides new members with refunds on starter kits within 90 days of purchase, the CEO added.

“It is telling that in the face of nearly daily negative headlines by our short seller, our product refund and return rate has continued to decline. … This trend is in direct contradiction to what one might expect if the short seller’s thesis is even close to accurate,” Johnson said.

Herbalife President Des Walsh asserted that the addition of 83,000 new U.S. members – consumers who bought products for themselves or with plans to distribute – during the January-March period also counters Ackman’s argument.

The quarter “marked the largest collective entrance of new members in Herbalife’s U.S. history” and “demonstrates the strong public confidence and interest in our company, our products and our business model,” Walsh said.

He added that Herbalife sees “tremendous white space opportunity” in the U.S. and expects that with distributors reaching as-yet untouched market opportunities in the country, the firm counts on increased U.S. growth for 2014 and beyond.

Chief Financial Officer John DeSimone said Herbalife increased its adjusted earnings per share guidance by 25 cents per share on both the low and high end of the range to between $6.10 and $6.30, representing an increase over 2013 between 13.6% and 17.3%. The firm also raised its full-year volume growth expectations by 150 basis points compared to previous guidance and now expects volume point growth of 8% to 10%.

Responses “To The Situation We’re In”

DeSimone acknowledged Ackman’s efforts have affected the firm’s public relations strategy.

“Our efforts are … in response to the situation we're in. We are in a campaign. That campaign is something that we think is beneficial to the long-term value creation of our stock and for the benefit of our shareholders. And we'll do whatever it is we feel we need to do,” DeSimone said.

“At the end of the day, there's a proactive and a reactive piece. And I think you'll sense that both have stepped up and will continue to step up,” he added.

Ackman’s short-selling gambit also is affecting Herbalife’s decisions on returning cash to shareholders. The firm’s board voted to suspend dividend payments for two years and spend $581 million on share repurchases that began in April and will continue in May and June. Its overall $1.5 billion share repurchase program will continue with $50 million in both the 2014 third and fourth quarters.

“It is the belief of management and the board that we have the opportunity to create long-term value for shareholders by repurchasing our stock now, while the overhang of the short-selling campaign has contracted” the value of the company’s shares compared to their price, Johnson said.

While addressing Ackman’s assertions in numerous comments, the Herbalife executives said little about separate investigations of the firm’s business practices by the Federal Trade Commission and the Illinois Attorney General’s office ([A#05140421005]). The firm also faces a proposed class-action complaint from shareholders.

Mentioning the FTC investigation, Johnson said, “Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace.”

Herbalife's independent distributors offer products including these sold as a breakfast pack.

“We are confident that Herbalife is in compliance with all applicable laws and regulations. Across the board, the facts are on our side,” he added.

Since January 2013, the firm has fended off accusations by Ackman, of Pershing Square Capital Management hedge fund, that Herbalife inflates reported retail sales made through its network of distributors. However, since Ackman revealed he was short-selling Herbalife stock, other investors, including Carl Icahn, have bolstered confidence in Herbalife by purchasing stakes in the company ([A#05140224008]).

Ackman, who also is working with Valeant Pharmaceuticals International Inc. in a proposed hostile takeover of competing specialty pharma firm Allergan Inc., in which Pershing Square is the largest single shareholder with 9.7%, produced a documentary film featuring former Herbalife distributors discussing their experience with the company ([A#00140505002]). The film debuted May 2 at a private screening in New York.

Herbalife dismissed the film “as nothing more than propaganda.”

Production Capacity Will Expand

Sales in China nearly doubled to $135.9 million, with the preferred customer program the firm started in 2013 a key driver, Walsh said. “We currently have over 200,000 preferred customers in China, and we look forward to continuing to expand this concept with some additional markets over the next couple of quarters,” he said.

Herbalife anticipates needing more manufacturing capacity in China. “We're about 66% of our capacity within China on a monthly basis. So sometime over the next 18 months we'll need to make sure we have new capacity ready to go,” Johnson said.

U.S. member growth helped drive U.S./Canada sales up nearly 12% from the year-ago period to $247.9 million.

The firm plans to start production in May at the Winston-Salem, N.C., plant it acquired in 2013 for $22.2 million and spent roughly $100 million to retrofit the facility to comply with supplement good manufacturing practices and update the machinery and technology Also see "In Brief" - Pink Sheet, 24 December, 2012..

“We expect to ramp up beginning the end of May this year, really it's an 18-month ramp-up,” Johnson said, adding that the plant will be about 3-cent dilutive per share in 2014 before becoming accretive in 2015.

Sales in Mexico were up 7.4% to $142.7 million while Central and South America sales grew 11.4% to $244.6 million, according to Herbalife’s earnings statement.

Walsh said distributors in Mexico, where the daily consumption club model for Herbalife product sales launched, are transitioning to operating commercial clubs in larger venues and for longer hours. The firm also increased its number of pickup locations by 50% in 2013 and is continuing to add more sites in 2014.

“Looking ahead, we will continue to add pick-up and fulfillment centers to better serve our members in this region. We expect this to contribute to further increases in sales and volume points in the region,” Walsh said.

Herbalife’s sales growth in Europe, the Middle East and Africa also was 24.5% to $211 million as distributors in European markets shift to the daily consumption-sales model that has been crucial for the firm’s overall sales growth worldwide.

Walsh said distributors in Europe and other EMEA countries also are using weight loss challenges and fitness and nutrition clubs to improve customization based on a client’s needs and help drive sales. He noted U.K. distributors particularly expanded during the quarter, with their net sales increasing 64%.

“Over the last few quarters, nearby markets have observed the U.K.'s growth and have strategized to adopt similar business practices. Markets such as Germany, France and Spain have found success localizing and implementing their daily consumption business practices,” Walsh said.

Herbalife Sales, Distributor Data Contradict Pyramid Scheme Allegation, Executives Say

More from China

More from Asia