Herbalife held an investor conference yesterday in an attempt to refute charges by short seller Bill Ackman. The conference did little to convince the market to buy Herbalife Ltd. (NYSE:LTD); after climbing during the conference, shares finished down 1.78%. Many sell side analysts attended the event. No sell side analysts have a sell on the stock (see here for the reason), but it is nonetheless interesting to see how they viewed the event.

If any big firm downgrades or upgrades the stock, it could greatly change investor confidence about the company. Right now Dan Loeb and Carl Icahn are on the long side, while Ackman and Whitney Tilson are short. Many investors are sitting on the sidelines, so the perception (and price) of the company could change if the sell side strongly takes one side.

Bank of America Merrill Lynch analysts (BAML) analysts have put out a report about the event, making them the first firm. Overall, they had positive feels, and still do not believe Ackman’s allegations. We list their main points below:

Herbalife Main Points

Key points made by management:



(1)  Herbalife Ltd. (NYSE:LTD)’s R&D is in line with supplement industry average.  2011 R&D was $1mil as per US GAAP, but HLF noted that when including other scientific and technical costs the company considers closely related to R&D, such as product development, technical operations, quality assurance, product safety, and compliance costs, that total would be $44million. The company also noted that its GAAP R&D spending in its 10K is consistent with GAAP R&D spending of peers.

(2) when calculated on a per serving basis,  Herbalife Ltd. (NYSE:LTD)’s Formula 1 meal replacement shake is actually priced in-line with competitor products.  When comparing the cost of HLF’s protein shakes relative to five competitors, HLF was priced competitively relative to the peer group when measured on a per serving basis. HLF notes that Formula 1 was priced at $1.29 per serving; this compares to the peer average of $1.30.

(3) 31% of HLF’s U.S. orders are actually shipped directly to non distributor customers.  YTD through 9/30, 1.4mil orders in the U.S. were shipped directly to non-distributor customers, with 460,000 unique addresses and an average order size of 260 volume points.


Two other points made by Lieberman Research, a company commissioned by Herbalife to conduct consumer research:

(1) 5% of all consumers surveyed claim to have purchased an Herbalife product in the past 3m, and (2) 73% of former distributors surveyed indicated that the motivation for signing up as a distributor was to secure a discount on the products.  The research firm noted that participants in this survey were not compensated.

The research firm also surveyed 400+ former HLF distributors. According to their results, 73% of respondents said they became an HLF distributor to get the product discount, 44% said they didn’t expect to make any money, 63% said they would recommend being a distributor to others, and 87% said they would recommend the product to others.

Product buybacks

According to the company, products can be returned for up to 12 months with no restocking fee (restocking fee removed in May 2012), and that less than 0.5% of products sold in the U.S. are returned. HLF also notes that 93% of its total company volume is done in markets with a buyback policy following the January 2013 implementation of a product buyback policy in Mexico; excluding Mexico would result in 75% of volume coming from markets with a buyback policy.

Company did not pre-release earnings

HLF did not pre-release Q4 earnings, as may have been widely expected; management instead indicated that it may do so in the next week or so, and that it will meet or exceed guidance. Until HLF reports Q4, it remains in blackout and consequently, has used only $50m of its $1B buyback authorization. BAML expects the company to begin more aggressive buyback activity once Q4 results are pre-released.

Herbalife has contacted regulators – no more color

Management noted that it has contacted regulators, but would not give incremental color. It remains unclear which regulators were contacted and to what end, but BAML believes that the company likely reached out to the FTC.

Maintain Buy rating

BAML maintains their buy rating, but noting that near-term trading will likely remain volatile as Herbalife and Bill Ackman continue this very public debate.  However, BAML still sees little tangible evidence to suggest validity to Ackman’s “pyramid scheme” allegations.

Disclosure: No position