Herbalife Ltd. (HLF)

[hughes16]

Bill Ackman's latest short thesis

Great summary of Bill Ackman's letter

Herbalife Short

Despite weak performance in Q1, share price has appreciated by more than 50% YTD
Due in part to HLF’s misleading portrayal of its first quarter operating performance and the company’s share repurchase program
Reported flat y-o-y constant-currency sales growth across the business
Growth in some markets (Mexico, EMEA, and China) was offset by substantial declines in others (South & Central America, North America, and Asia Pacific)
Reported significant persistent declines in South Korea, Brazil, and UK
Dramatic “pop” and “drop” reflected in HLF’s individual markets are highly characteristic of pyramid schemes, which achieved accelerated growth until a market reaches saturation, after which there is a dramatic decline in volumes as participants recognize that being a distributor is a money-losing proposition
While bullish investors have suggested that the company’s recent results show that it can manage effectively through the requirements of the FTC settlement, North American performance in the quarter does not yet reflect the impact of FTC permanent injunction
China at 20% of sales is HLF’s second largest segment after North America – while China realized 17% volume growth in Q1, management noted that there was a significant pull-forward in volume ahead of a 5% price increase in April
10-Q included significant notable changes to risk disclosures with respect to China
“Uncertainties relating to interpretation and enforcement of legislation in China governing direct selling and anti-pyramiding”
Would not be surprised to learn that HLF is under investigation by Chinese authorities, particularly in light of the recently announced Foreign Corrupt Practices investigation of HLF’s China operations by the Department of Justice and the SEC
Believe the injunctive relief imposed by the FTC is likely to weigh significantly on HLF’s financial performance in the coming quarters
Coupled with decelerating growth and substantial deterioration in many international markets, expect earnings to decline on an operational basis in 2017
Despite above issues, now trading at 17x the midpoint of management’s adjusted guidance
Currently trading at highest P/E ratio in its history as a result of recent stock price increase and its declining earnings