New piece on Herbalife LTd. (NYSE:HLF) of Quoththeravenresearch.com @QTRResearch
I find something very weird about Herbalife’s new joint venture with Tasly Holding Group.
Mostly, it just doesn’t make any sense.
I’m not an expert in the products that Tasly offers nor am I an expert on how these two companies plan on hammering out this joint venture, but from what I learned in the press release only, something doesn’t smell right.
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I could spend 5,000 or maybe even 10,000 words going into detail about what an atrocious quarter Herbalife just had, but most everybody already understands that at this point. Sales are down in China, which is supposed to be the company’s biggest opportunity for growth and Herbalife significantly lowered its first quarter guidance to $0.75-$0.95 versus Wall Street estimates of $1.25-$1.35. If you’re worried that this punt in the nuts to sell side analysts covering the company may have finally caused some analysts to capitulate (and/or come to grips with reality), worry not. Tim Ramey has already reiterated his $90 price target on the company, just hours after telling – err, asking – the company if they were 95% finished with their FTC implementation,
Ramey: If we were thinking about the May 15 implementation, where would you say you are in terms of percentage completion of your task, essentially there 95% – there’s still a little bit more work to do. How would you characterize that?
Maybe next quarter Ramey can just hold the Q&A with himself. As analyst Zander Rosenbluth pointed out on Twitter, Ramey’s last projected 2017 EPS estimate for Herbalife was $5.35. The company just came out and said $3.65 to $4.05, so why would there be any need to adjust your price target?
To quote Lou Brown, “Can you believe this s$it?”
Despite the horrendous Q1 guide, Herbalife kept its full year outlook inline, a move that suggests to QTR that the company doesn’t really understand what this upcoming documentary may very well do to it over the course of the long term. I’ve seen the movie and I continue to believe it’s going to have a much deeper negative impact than a lot of folks imagine. If you want additional thoughts on the quarter, check out my last hundred or so Tweets about Herbalife after the report came out. If you want a glimpse of what the public, through theaters and Netflix, are in store for when Betting on Zero is released you can watch the new trailer here and read my World Premier First Review.
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In addition to releasing a horrendous quarter and touting the “strength of the balance sheet” of a company that will soon be pushing 5X EBIT in leverage, Herbalife also announced a joint venture with Tasly, a “traditional Chinese medicine” company.
The fact that the company is making some strategic moves or considering some M&A is not a surprise to me. I had actually been thinking for a while that Herbalife may want to roll up a company like Vitamin Shoppe or Nutrisystem in order to legitimize the business a little bit and take some pressure off of the direct selling model. Those types of acquisitions make sense to me. They make sense because with the multilevel marketing distribution model under fire, the goal of the company should be to diversify itself and give itself another leg to stand on aside from the asinine direct selling model.
But with this Tasly deal, they are doing just the opposite. The press release states that they are going to be taking products from Tasly and looking to sell them through Herbalife’s distributor network. The press release says:
The joint venture would develop and commercialize high-quality consumer health products based on Tasly’s deep portfolio of proprietary formulations, patents, know-hows, and clinical studies by leveraging the Herbalife Nutrition scientific, regulatory and commercial development expertise to bring products to a global market through the Herbalife Nutrition distributor network. The proposed joint venture furthers the Herbalife Nutrition business plan to expand its product range globally.
Expand its product range? What was wrong with Herbalife’s already existent line of products? Perhaps things went awry when John Oliver described the company’s soup mix as tasting like “the wood shavings inside a gerbil cage”.
In other words, Herbalife is just bringing on more products, but using the same garbage business model. This is the exact opposite of what makes sense and it puts even more pressure on the company’s direct selling model going forward. They are doubling down on the model instead of playing it safe and diversifying.
It is even more surprising when we take into account that it appears as though one of Tasly’s subsidiaries (Kasly Ju) already has a direct selling license in China.
For me, some interesting questions start to pop up. Questions like:
- “Are Tasly’s products so different and so in demand that they can be a standalone revenue driver for a company that already sells nutritional products via a direct selling model across the globe?”
- “If Tasly already has a direct selling subsidiary, what do they need Herbalife for?”
It also leaves me questioning whether or not the company has looked at traditional acquisitions in the retail space the way that I pointed out earlier. I would have to assume that they would have, only because it seems to be the scenario that makes the most sense. Is it possible that none of the companies that they targeted wanted to work with them, or is it more possible that Tasly is the first and only company that they identified as a potential candidate?
With $1.5 billion in the bank from a new debt issuance, it just seems as though the money could be used in such a better way. Playing devils advocate, I would use that money to buy a traditional retail nutrition company and then maybe use the rest to buy back stock – only if it falls. The fact that we are simply going to see a $1.5 billion buyback go “poof” nearly immediately makes it seem as though the company is out of ideas. The fact that I can’t quantify or really make sense of this joint venture at this point, can’t help but make me think that there may be something else going on behind-the-scenes.
Is it possible there’s another reason for this joint venture?
