ValueWalk

Herbalife Ltd. (HLF): Distributor Earnings Disclosure Statements

Herbalife Ltd. (HLF): Distributor Earnings Disclosure Statements by William Keep, Seeking Alpha

Summary

Herbalife Ltd. (HLF) wants distributors “to have realistic expectations of the possible income you can earn”.

The FTC wants consumer protection.

Earnings statements as currently structured ensure that neither happen.

A month ago I asked if current MLM distributor earnings statements constitute deceptive advertising, referencing the selective disclosure of data readily available to an MLM company and highlighting the failure to report the persistence of earners in each category. To the extent that the same people occupy top earning categories year-after-year (and unbeknownst to readers of the earnings statement), the apparent opportunity of reaching a particular earnings level appears to be much greater that the actual opportunity. In short, top earner persistence leads to an unseen stacked deck against newcomers. I followed that point by noting that the FTC exempted MLM companies from the revised Business Opportunity Rule through a faulty cost-benefit logic that failed to recognize the potential for improved consumer protection through employing data available at negligible cost to the MLM firm. On Sunday, Herbalife (NYSE:HLF) upped the ante.

Beginning in 2013 and continuing with the new 2015 “STATEMENT OF AVERAGE GROSS COMPENSATION,” Herbalife expresses in writing a desire to help current and prospective recruits understand the path to earnings, stating: “we want you to have realistic expectations of the possible income you can earn” (see 2013 and 2014). I take no issue with the word choice of “possible income” since results will certainly vary among distributors. Yet, that fact, in and of itself, makes the formation of “realistic expectations” even more important and valuable to distributors. Unfortunately, Herbalife again fails to provide the information needed to form a realistic expectation. Such failure for one year could be an over-sight, but three years in a row seems an affront to distributors and opportunistically relies on the FTC’s flawed cost-benefit logic noted above. As Kyle Rissdal on the NPR business report says, “Let’s do the numbers.”

In 2015, approximately 19.8% of all distributors built a downline, 90.6% of whom became eligible to earn compensation for Herbalife. Let’s label these 97,887 distributors eligible for earnings “Aspirants,” since they took the effort to develop a downline. [To check my math: of 545,160 total distributors, 108,008 build a downline (19.8%) and of these 97,887 (90.6% of downline builders; 18% of all distributors) became eligible for compensation]. In terms of actual earnings, 20.1% earned $0, 17.1% averaged $51, 43.6% averaged $303, 11.9% averaged $2,202, and 2.8% averaged $7,130, with none obtaining more than $10K in gross earnings. You will not see any of these percentages in the chart. In sum, 95.5% of all Aspirants earned, on average, $627.55, or the equivalent of working 1.7 hours per week at the federal minimum wage (i.e., $7.25 in 2015). Herbalife does say, “There is no shortcut to riches, no guarantee of success.” Point taken.

[For readers interested in this issue beyond Herbalife, here I estimate that in 2014 97.3% of all Advocare distributors earned less than income earned from working two hours per week at minimum wage.]

Ah, but to be among that remaining top 4.5%. Maybe just a bit more work separates the MLM men/women from the MLM boys/girls. If I were lobbying the Federal Trade Commission this would be my story: success is hard to achieve but the data shows it is doable. Indeed, if I am a prospective distributor I might well let this data shape my “realistic expectations” since it is the only data publicly available. Further, if I were to look at previous years I would see a similar pattern, adding credibility to the perceived probability of success. Except, that perception would be wrong, possibly off by many multiples. Presently, we can only question why the FTC chooses to ignore data readily available to MLM companies that would create more realistic expectations of successful earnings. Whatever the answer, multiple years of evidence indicate that it is surely a question worth asking.

In 2015, 637 Herbalife distributors earned more than $100K. Let’s label them “Achievers.” These Achievers represent .65% or 6.5 out of 1,000 Aspirants in 2015. However, if 100 Achievers rolled over from the previous year then the probability of going from Aspirant to Achiever goes to .55%; if 200 rollover from the previous year, the probability goes to .45%; if 400 the probability goes to .24%; and if 600 the probability goes to .038% (or, just under 4 in 10,000). I ask the FTC to consider, in their mandate to provide consumer protection, which of these would it be? Is the probability of an Herbalife distributor who builds a downline and reaches $100K+ earnings in a given year approximately 6.5 per 1,000 (proportionally, 65 per 10,000) or 4 per 10,000? The difference is substantial and the answer knowable using data readily available, so it is time to call the question.

Herbalife, in whatever wisdom, provides some additional information that, rather than helping, simply muddies the water. Near the bottom of the document Herbalife notes: “The majority of those Members who earned in excess of (USD) 100,000 from Herbalife in 2015 had reached the level of Herbalife’s President’s Team. During 2015, four U.S. Members achieved the level of President’s Team. They averaged nine years as an Herbalife Member before reaching President’s Team, with the longest duration being 14 years and the shortest being less than three years.”

OK, maybe this is what the FTC sees as a good presentation of data to assist consumers in obtaining realistic expectations. Among Achievers, there are those who reached the President’s Team and those who did not. In 2015 those who did not were in the minority (but no report on the actual percentage). Among those who did, four distributors achieved the President’s Team in 2015. As homework for prospective and current distributors, try to calculate the number of new Achievers (i.e., earned > $100K) in 2015. What’s your answer? Who has “four”? Not necessarily because nowhere does it say that those new to the President’s Team were also new to making $100K+ in earnings. Given the information provided, the answer cannot be ascertained.

To sum up, we do not know (though Herbalife knows) the number of new President’s Team members who were also new to the $100K+ earnings level, nor do we know how many of the non-President’s Team members were new Achievers in 2015. If four is the actual number of Aspirants new to the Achiever level then was the probability of an Aspirant reaching Achiever level in 2015 .004%, or 4 in every 100,000? No, again that cannot be ascertained because it took each of the four Aspirants multiple years to reach the President’s Team level, ranging from 14 years to less than 3 years. Of course the total number of Achievers can increase from one year to the next, making room for new entrants; it can also decrease. In 2014 there were 713 Achievers, 11.9% more than in 2015. So we are back to where we were; namely, neither Herbalife nor the FTC has helped distributors “to have realistic expectations of the possible income you can earn.”

Hopefully, as a result of the current HLF investigation the FTC will affirm its consumer protection mandate and require, at the very least, a far more transparent, multi-year disclosure of the probability of success in this MLM’s proposed business opportunity. The data is there; we need now only the will to increase consumer protection.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have received no compensation from any parties associated with the Herbalife controversy and have no known financial position associated with any firm mentioned.

Herbalife