Hedge Funds | February 4,
2013, 8:51 pm
Seeking a Company’s Elusive Sales Data
By PETER EAVIS
Scout Tufankjian for The New York Times
Montalban mixes a drink for a customer at his Herbalife storefront in
the Corona area of Queens.
Prominent Wall Street investors are arguing acrimoniously over whether the
nutritional supplements company
Herbalife is a pyramid
The company’s fate, though, will ultimately be determined by ordinary
people like Victor Aragundi, a taxi driver from Corona, Queens, who
regularly visits a local Herbalife storefront to buy teas and protein
“They help me reduce weight,” Mr. Aragundi said. “They replace regular
In many ways, the fight over Herbalife boils down to one question: How
many Mr. Aragundis actually exist?
As regulators and investors scrutinize the company’s sales, they face a
major stumbling block. The public numbers do not provide a clear picture
of who buys Herbalife products — and why.
So-called direct-sales companies like Herbalife operate in an accounting
gray area that allows them to book goods bought by its network of sales
representatives as revenue. Most traditional retailers record sales when a
customer buys something.
The uncertainty has left shares of Herbalife vulnerable to wild swings in
recent months. On Monday, the stock sank sharply in the morning over fears
that the company faced new regulatory scrutiny, but it later shook off the
Investors are betting on the extremes: Herbalife is a pyramid scheme or it
Scout Tufankjian for The New York Times
Montalban in his Herbalife store.
Some investors have bet against the company, contending that it is a
William A. Ackman, a hedge fund manager, has called the company an abusive
pyramid scheme and said the stock was essentially worthless. He says
repeat purchasers like Mr. Aragundi are not the main source of Herbalife’s
sales but rather sales recruits. If a significant number of the recruits
fail to sell the goods, they can face large losses.
“Money from the millions of low- and middle-income people at the bottom of
the pyramid is being transferred to the tiny fraction of distributors at
the top of the pyramid,” Mr. Ackman said in an interview. “It’s Robin Hood
The company has fought back, generating support from big investors like
Daniel Loeb and
Carl C. Icahn. Herbalife
cites its long history of sales growth and its compensation plan, which it
says focuses on product sales, not recruitment.
“Herbalife is a financially strong and successful company, having created
meaningful value for shareholders, significant opportunities for
distributors and positively impacted the lives and health of our consumers
over our 32-year history,” Barbara Henderson, a spokeswoman for the
company, said in a statement.
But it is hard to discern the underlying demand. The company doesn’t
specify how many of those products are eventually sold to customers
outside the sales network. Nor does it detail how many products are
consumed by members of its network.
One saleswoman who left Herbalife in October said she saw little consumer
demand. “They want to make people believe there is this long line of
consumers,” said Ana Arias, of Scottsdale, Ariz., who was part of
Herbalife’s network for three years before quitting. “I realized it was
going to go nowhere.” Ms. Arias, who is considering legal action against
Herbalife, estimates her overall losses at $210,000.
Ms. Arias’s name was mentioned in a consumer’s complaint about Herbalife
that was submitted to the Federal Trade Commission last year. The
complaint was one of 188 released by the commission in response to a
Freedom of Information Act request by The New York Post.
Frank Dorman, a spokesman for the F.T.C., declined to say whether the
agency was investigating Herbalife. In a statement on Monday, the company
said that except for “voluntary dialogue with regulators,” it was “unaware
of any other regulatory interest and/or investigation.”
The enforcement division of the
Securities and Exchange Commission
has opened an investigation into Herbalife, according to a person briefed
on the matter. Last year, the agency exchanged letters with Herbalife
about its financial disclosures. In 2011, Herbalife stopped including data
in its annual report about members’ buying patterns, and the agency wanted
to know why.
Some people in the Herbalife network say consistent consumption drives
profit. Edgar Montalban, an Herbalife salesman who oversees the Queens
location that Mr. Aragundi visits, says the store has monthly sales of
$4,000 to $5,000. He declined to say what his personal income was from the
store, as well as his earnings from sales recruits. “We promote daily
consumption,” he said through an Herbalife representative.
In theory, Herbalife could silence the critics by disclosing a crucial
number in its financial statements: the percentage of sales outside its
network. It would be hard to call the company a pyramid scheme if it
disclosed that, say, 80 percent of its final sales were to customers,
rather than new sales representatives.
Some industry executives have promoted the importance of this number. “The
final litmus is, ‘Who is the customer?’ ” Rick Goings, the chief executive
Tupperware Brands, said
last week in an interview with CNBC.
More than 90 percent of Tupperware’s sales are to people outside its
network, he said. The remaining amount, he said, is to sales
representatives who like the company’s new products. Tupperware, however,
does not include this number in its public financial disclosures.
Regulators also emphasize sales such figures.
Last week, the Federal Trade Commission, along with some state attorneys
general, moved to shut down Fortune Hi-Tech Marketing, accusing it of
being a pyramid scheme. The lawsuit noted that few of the products were
ever sold to anyone outside the network.
Herbalife says it does not collect comprehensive data on sales to people
outside its network. Herbalife does, however, require its sales
representatives to keep records of their transactions.
To address the skepticism surrounding the company’s external sales,
Herbalife has provided two pieces of new data. The company said 31 percent
of its orders in the United States were “directly shipped” to customers
outside its network. It also produced a study by a consulting firm,
Lieberman Research Worldwide, that found that 92 percent of Herbalife
sales went to people outside the company’s network.
The study was not based on Herbalife’s actual sales data. Instead,
Lieberman extrapolated from an Internet survey that the company had more
than six million customers. Given the 480,000 Herbalife distributors in
America, the firm estimated that only 8 percent of Herbalife products were
consumed within that network.
Des Walsh, Herbalife’s president, said the study validated the company’s
view that people in its sales network “are selling to millions of
customers outside the distribution channel.”
Defenders of Herbalife can point to the meager number of regulatory
actions. In theory, an abusive pyramid scheme that produces scores of
failed recruits should generate a steady stream of complaints.
That does not seem to be the case with Herbalife.
An official at the office of the attorney general of California said it
had received no more than five complaints a year about Herbalife over the
last eight years. And those complaints were mostly related to Herbalife’s
products, not its recruitment practices, said the official, who requested
anonymity because he was not authorized to speak to the news media on this
Still, pyramid schemes may not produce large numbers of complaints.
In its home state of Kentucky, Fortune Hi-Tech Marketing, which was
accused of being a pyramid scheme, received only about a dozen official
complaints since 2008, according to the office of the state attorney
general. Allison Martin, a spokeswoman for the office, explained that
victims of a pyramid were often embarrassed about revealing losses.
Fortune Hi-Tech may also have focused on people who were not legal
immigrants, which might have made them even less likely to report the
scheme, Ms. Martin said.
On a recent winter morning, Herbalife customers in Queens brushed aside
the controversy. Mr. Aragundi, the taxi driver, and others streamed into
the store for their daily teas and shakes.
“Four years ago I took the product,” said Mr. Aragundi. “I lost like 30
A version of this article appeared in print on 02/05/2013, on page B1 of
the New York edition with the headline: Seeking a Company’s Elusive Sales
The New York Times