NEW YORK Herbalife Inc (HLF.N) disclosed more information on Wednesday about how much its U.S. distributors earn, looking to provide more clarity as it defends its business model from critics like billionaire hedge fund manager Bill Ackman.
The greater detail about 2012 distributor compensation follows sustained criticism by Ackman, who has a $1 billion bet against the company and alleges that its direct-selling model is nothing more than a "well-managed pyramid scheme."
Ackman's arguments include assertions that Herbalife's disclosure on average compensation is "materially deceptive" and that Herbalife distributors "experience an abnormally high failure rate." Wednesday's enhanced disclosure is intended to address those concerns.
Specifically, Herbalife says that 88 percent of its distributors received no payments in 2012, including 71 percent who did not recruit any other distributors. The remainder potentially recruited other distributors but did not make money because their recruits did not sell enough product.
Herbalife said that on average, 73 percent of its "distributors" join Herbalife just to get a discount on the products rather than to earn money.
That goes "a fair ways down the road to change the math for Ackman," said D.A. Davidson analyst Timothy Ramey. "Ackman kept including these people in the denominator, representing them as failed businesses. They're not failed businesses."
Ackman was not immediately available to comment.
The new disclosure, posted on Herbalife's website on Wednesday, reveals the compensation structure for Herbalife's entire distributor network, not just for the upper tier as it had in the past. How much Herbalife pays its distributors, and for what, is a central theme in the high-stakes debate over the legitimacy of its business.
Herbalife President Des Walsh told Reuters that Herbalife is not a pyramid scheme because its distributors do not get paid anything for recruitment in and of itself. He does agree that recruitment is a path to greater income, since distributors can get payments related to the sales performance of distributors they recruit.
In Herbalife's 2011 disclosure about distributor compensation, it only mentioned payments for those distributors that made it to supervisor level or higher, a group that in 2012 only accounted for 17 percent of all U.S. distributors.
CRITICISM WILL CONTINUE
Still, Herbalife anticipates the increased disclosure is unlikely to silence critics like Ackman, who asserts that Herbalife distributors make 10 times as much from recruitment as they do from selling product.
"We believe many of those critics are guided by a profit motive and to that extent it is likely that any information we provide will continue to be criticized, not because of its insufficiency or its inadequacy, but simply because it is not in the interest of these people to accept anything that we say," Walsh said in an interview on Wednesday.
The disclosure, which Reuters exclusively reviewed before its posting, also mentions a "money-back guarantee" of 90 days for its "international business packs" and one year for return of resaleable inventory upon leaving the business.
It also says distributors are not paid for sponsoring new distributors.
The amount of money made from selling product, versus recruitment, is something regulators would consider in determining if a direct-sales company is a pyramid scheme.
Officials at the U.S. Federal Trade Commission have described pyramid schemes as arrangements where promised profits are based on recruiting others, rather than any real sale of goods to the public.
Herbalife is a 32-year-old company that sells products through a network of independent distributors, some of whom set up shops where customers go to have Herbalife diet shakes or tea. It has denied Ackman's criticism, saying it is a financially strong and successful company.
Walsh said the company wants to give prospective Herbalife sellers and investors more information.
He said the company is also planning to hire a vice president of research, which will help it get a better sense of its market. The company recently initiated a search, Walsh said, and hopes to fill the position in a few months.
Walsh also said the company was considering changing the labels used to describe the various levels of distributor, in an effort to make it easier to understand.
The Direct Selling Association, a trade group, is also considering guidelines for labeling, according to Joseph Mariano, its president.
"It's not a change in practice or how the business model works, but just a nomenclature perhaps that could be a guideline," Mariano said.
MORE COMPENSATION DETAILS
Compensation in 2012 ranged from average payments of $104 for 2,466 people at the lowest Herbalife distributor level to average payments of $724,030 for 194 people at the top.
But the payments do not include money earned on actual sales of Herbalife products to others, or take into account expenses incurred by the distributor, which could include product and advertising costs, training, rent and travel costs.
As such, Herbalife cautioned that the figures are not actually representative of the compensation a distributor will receive.
In addition to the more detailed data, Herbalife adopted a cautious tone in its statement, warning potential sellers that an Herbalife distributorship is "something like a gym membership: results vary with the time, energy and dedication you put into it".
"It is hard work," the statement said. "There is no shortcut to riches, no guarantee of success."
BATTLE OF THE TITANS
Herbalife tumbled nearly 39 percent following the December news that Ackman's fund Pershing Square Capital had a short position valued at around $1 billion. It more than recovered but then fell again in January on fears of U.S. regulatory action.
Shares of Herbalife, which rose 4 cents on Wednesday to $35.79, are down nearly 40 percent from a year ago.
Aside from Ackman, the storm over Herbalife is attracting other influential investors. Third Point's Daniel Loeb has a stake in the company and has come out against Ackman's argument, and Carl Icahn is reported to have a stake though he has not publicly confirmed it.
Icahn had slammed Ackman's position and the two billionaires faced off on live television last month in a bruising verbal scrap that included insults and expletives.
Earlier this week, a newspaper report said Herbalife was the object of a law enforcement probe, citing a disclosure by the FTC that was later described by the agency as containing inappropriate boilerplate language.
Federal and state regulators shut down direct-sales company Fortune Hi-Tech Marketing last month following complaints that the company was operating a pyramid scheme.
(Reporting by Martinne Geller in New York; Editing by Tim Dobbyn)