So far, multi-level marketing company Herbalife is responding to an attack on its business and stock the same way most troubled companies do:
With bluster and vague denials rather than facts.
Herbalife quickly denounced the 342-page presentation shortseller Bill Ackman gave last week, denying that it is "an illegal pyramid scheme."
To its credit, the company also promised to go through Ackman's points in detail at an analyst meeting in early January.
But beyond that, all that has come out of the company is hot air.
Herbalife CEO Michael Johnson described the scene as the company's top executives listened to Ackman's performance last week, as recounted by the LA Times:
About 15 company officials, including Johnson, sat at a conference table in company headquarters and watched Ackman's presentation, growing angrier as he made his case.
"There were a lot of cat-calls. He's not up to speed on the Herbalife of today," Johnson said. "It was so filled with inaccuracies I haven't got the time. Our distributors get compensated for selling the product, not for recruiting."
That aside--that Johnson "hasn't got the time" to explain why Ackman is wrong--is a typical response for a company that can't rebut an attack with facts.
Perhaps what Johnson meant is that he doesn't yet have the facts with which to rebut Ackman, but will by the analyst meeting on January 7th.
Among other things, at that meeting, Herbalife will have to explain the following:
- Why and how it can charge much more for generic commodity products than its competitors
- Why it markets these products as if they're remarkable and unique and based on proprietary research and development
- Why it reports a "Retail Sales" number that appears to be grossly inflated (The company will have to specify exactly how it arrives at this number. And the number had better be actual retail sales, not retail sales assuming all products are sold at the suggested retail price, which they clearly aren't).
- Why the company experiences a "pop and drop" pattern when it enters new markets: In which sales temporarily explode and then collapse (Not a pattern typically seen by companies in which real customers actually buy products because they want them)
- What percentage of the products bought by Herbalife's "distributors" are actually sold to third-party customers (and how the company knows this)
- What percentage of new Herbalife "distributors" eventually make a living selling Herbalife products...and how do they make this living? (By recruiting other distributors? Or by selling a lot of product. This is the key question).
Ackman's presentation was extremely compelling. At the very least, it made Herbalife look extremely sleazy--a marketing scheme that preys on the hopes, dreams, and wallets of poor people looking for a way out of the low-wage grind, instead of a company that makes products that people actually want to buy.
If that's an unfair characterization, Herbalife ought to be able to demonstrate that clearly--with facts, not bluster and vague denouncements.
So the January 7th meeting will be interesting.
SEE ALSO: Bill Ackman's Herbalife Takedown