Whitney Tilson Notes Herbalife, Avon Story; Likes Alibaba

Whitney Tilson Notes Herbalife, Avon Story; Likes Alibaba
Whitney Tilson

In an email sent to investors, Whitney Tilson discusses Avon Products, Inc. (NYSE:AVP)’s membership withdrawal from the Direct Selling Association and its implication on Herbalife Ltd. (NYSE:HLF) and Ultrasonic AG (ETR:US5)’s fraud, as we earlier noted would one day be a case study.

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As promised in my last email, attached is an updated version of the presentation I gave at the Value Investing Congress last week entitled Lessons From a Dozen Years of Short Selling (it’s also posted at: www.tilsonfunds.com/Shorting.pdf). In it, after sharing some lessons, I updated my analysis of two very successful (but still attractive) short positions, K12 and Lumber Liquidators, and presented one of my current favorite shorts, EXACT Sciences Corporation (NASDAQ:EXAS).

Whitney Tilson: Avon withdraws its membership in the Direct Selling Association

Avon Products, Inc. (NYSE:AVP) issued a press release Friday that it has withdrawn its membership in the Direct Selling Association, following Tupperware Brands Corporation (NYSE:TUP), which did so a year ago. It’s clear that AVP and TUP are trying to distance themselves from scummy and likely illegal multi-level marketers like Herbalife Ltd. (NYSE:HLF), USANA Health Sciences, Inc. (NYSE:USNA) and Nu Skin Enterprises, Inc. (NYSE:NUS). Avon’s letter of resignation cited “three major aspects of our business model that we believe further safeguard our Representatives and consumers.” All three aspects contrast markedly with HLF’s model and consequently leave the impression that Avon is acting with a sense of urgency to distance itself from HLF and similar operations. Those “three major aspects” are [with my comments in brackets re. the difference with HLF]:

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  1. The Avon business model does not rely on nor does it encourage sales of inventory, training or business support materials between Representatives. [In the world of HLF all of the above are common practice as the senior distributors prey on the members at the bottom of the pyramid.]
  1. Avon has reasonable return policies. [Although HLF recently adopted (in response to Ackman’s charges) a “Gold Standard” return policy, which has considerably improved the plight of the low-end distributor stuck with inventory, HLF still employs usurious shipping and handling charges as well as a maze of forms that no one would categorize as “reasonable.”]
  1. Avon limits earnings to three generations. [Strike three for HLF, which employs the infinite chain of recruitment rewards in its pyramid structure. If HLF adopted a three-generation limit, the model would implode.]

Whitney Tilson – Here’s Herb Greenberg’s take on this (his full article is below):

Reality: If the entire industry operated with a sharply limited downline, using the Avon model, the business models for most multi-level marketers would go through a hard reset. Much of the unlimited model is based on downlines of distributors that purchase product from the company, kicking shared profits up the line. It’s unclear if Avon is trying to put a bug in the ear of the FTC, especially if the FTC (as a result of its Herbalife probe) decides to create new rules for the multi-level marketing industry. If so, it’s a brilliant move, especially if the FTC ultimately decides not to formally go after Herbalife, but instead gives the industry a new set of rules to live by.

Whitney Tilson: One of the more brazen China frauds I’ve ever seen:

This is an actual headline from a company press release: “CEO and COO disappeared, most of the company’s cash missing.” (Via FastFT)

In a statement, German-based shoe company Ultrasonic said its CFO, Chi Kwong Clifford Chan, has been unable to reach the company’s CEO, Qingyong Wu, and COO, Minghong Wu, who apparently left their homes and are untraceable.

Chan also said most of the company’s cash funds have been transferred and are no longer “in the company’s range of influence.”

So basically the money’s gone.

Shares of Ultrasonic AG (ETR:US5) trading on the Frankfurt Stock Exchange were down as much as 76% on Tuesday.

I continue to believe that China is almost uninvestable due to widespread fraud like this, little rule of law, etc., but I do think Alibaba is real – and own it through Softbank.


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  1. This is a very well written article. Some comments:

    Amway probably wasn’t mentioned because it is privately held, but it remains THE largest and THE most abusive MLM, given the #1 dollar volume, about $12 billion/year, high product prices (which are present in most MLMs) and the tool scam (which are present in many MLMs, but not as comprehensive as Amway’s). Avon is the second largest MLM, and Herbalife the 3rd largest, which puts Amway in an extremely exposed position, especially since HLF (theoretically) shut down their tool scams over the past year or so.

    While Amway doesn’t have a lot of inventory issues, the training/business support materials (aka, Amway Tool Scam) abuse is second to none.

    Regarding the “(theoretically)” above, we also don’t know whether HLF is enforcing the “no profit from tools” edict, we don’t know if it applies world-wide or only to the U.S., we don’t know whether the tool scam has merely been transferred to HLF corporate instead of the higher level distributors, and we don’t know how much money HLF is paying the high level distributors in lieu of the previous tool scam profit to keep them from jumping ship to another MLM where they can continue their tool scams, as happened with at least 2 high level HLF distributors in early 2013 when most abusive of the tool scam programs, lead generation, was announced, with another high level HLF distributor literally committing suicide with a bullet through his skull shorty before the compliance date (google “John Peterson Herbalife”).

    Regarding the return policy, many HLF distributors who buy the inventory to get the discount about the standard 25% level (the 25% “discount” still makes the products far more expensive than market alternatives, so a higher discount is needed to be able to sell them to external customers) stay in for over a year trying to make the business work, and they are encouraged by their upline it takes several months to a couple of years to “catch on, gain momentum, explode, etc.,” so they can’t return the products, HLF makes the return process very difficult, plus the non-product expenses that are not reimbursable are FAR more than the product cost, AND an HLF distributor can’t return excess product purchases without also resigning their distributorship. So if they over-purchase, but don’t want to quit, they are stuck between the proverbial rock and a hard place. Other companies, such as Amway, allow returns without having to resign, although the period of time is shorter.

    Regarding the 3 generation limit, I would be more inclined to agree with the HLF implosion argument if the tool scams still existed, as the unlimited levels also make almost limitless profit from the tool scams possible. However, tool profit is no longer an incentive, and now the biggest impact of a 3 level limit is more emphasis on width. Keep in mind that most organizations already have most distributors within 3 levels of the breakaway point, so the impact is not as large as one may assume. The unlimited depth DOES increase the cost of the products as the unlimited payments are usually a small percentage of the product cost to a very small number of people. As I posted on my blog, these multi-million dollar checks are essentially a marketing cost. See an example here: http://df5eshuaiifdc.cloudfront.net/wp-content/uploads/image/Dexter%20check.jpg What is most disgusting about the check is it is peanuts compared to what these scam artists make from the ATS, which is described in detail on my blog: http://www.StopTheAmwayToolScam.wordpress.com

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