Herbalife stock rallied on Tuesday, but not enough to recover what was lost on Monday after the company slashed its second quarter sales guidance. Herbalife Ltd. (NYSE:HLF) thumbed its nose at Bill Ackman by exceeding a key threshold set by the Federal Trade Commission to keep itself from being labeled a pyramid scheme.
However, the activist investor is demanding that the company explain some insider share sales as the timing of everything looks a bit fishy to him, given that it raised guidance before those sales and now has cut its guidance.
Herbalife exceeds FTC settlement guidelines
In a note dated June 5, Pivotal Research analyst and Herbalife perma-bull Timothy Ramey reminded investors that Herbalife was told it would have to disclose the percentage of U.S. sales that fit the guidelines set by the FTC. It was part of the settlement aimed at keeping the company from being branded a pyramid scheme by demonstrating that products are being sold to end customers and not only to distributors.
The agency demanded that at least 80% of sales be one of four different types of retail sales, and Herbalife ended up being able to prove that 90% of its sales in May met the guidelines. As a result, Ramey boosted his price target for Herbalife stock from $105 to $120 per share. He said had been expecting the company to do much better than the 80% target, but he hadn’t been expecting it to happen so soon. In April, Herbalife had said that “over 70%” of its U.S. sales fit one of the four categories.
“Terribly disappointing” for Herbalife stock short-sellers
Ramey added that the news must be “terribly disappointing” for those who are shorting Herbalife. He noted that a key part of the short thesis was built on demonstrating that the company is a pyramid scheme because distributors are buying the products for itself and getting regulators to recognize this and shut it down. However, the company appears to have dodged both of these elements of the short thesis.
He also referenced another short thesis which he said is “completely plausible and, as yet, unrefuted case” that sales will slow due to the changes in the business model. He finds this to be a possible and “quite rational view,” although he disagrees with it. He added that Herbalife bears who fall into this category were probably happy to hear that the company cut its sales outlook this week even though it also boosted its earnings per share guide by 10 cents.
However, he feels that the slowdown will be short-lived and that the company’s sales will reaccelerate soon.
Herbalife stock – Bill Ackman still has questions
Activist investor Bill Ackman remains firmly in the camp which sees Herbalife as a pyramid scheme, and he’s still not giving up on his fight to take the company down. He’s now going about it from a different angle though, given that regulators have not cooperated with his pyramid scheme plot. He wants an explanation for the recent timing of events.
According to CNBC, Bill Ackman noted that on May 4, the company boosted its guidance, sending its stock to new highs. Then company insiders sold their shares and options, and then less than three weeks later, it cut guidance and claimed surprise at the lower volumes in the first month the FTC settlement went into effect. He also claimed that general counsel Mark Friedman, “the only signatory of the settlement agreement with the FTC” and other key executives have suddenly left, although he said the company hadn’t disclosed the departures.
Shares of Herbalife climbed by as much as 1.83% to $70.25 during regular trading hours on Tuesday.