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Strong Results in China Provide Lift to Herbalife

February 19, 2014

Take that, Bill Ackman.

Pity Bill Ackman. The billionaire hedge fund investor who has accused Herbalife Ltd of being a pyramid scheme, is facing more losses in his short bet as the nutrition company raised its forecast for the first quarter of 2014 on strong sales growth in China.

Herbalife's China sales rose more than 120% in the fourth quarter of 2013, the fastest of any region worldwide, prompting the firm to estimate adjusted profit of $1.25 to $1.29 per share in the first quarter this year. It had earlier forecast $1.24 to $1.28 per share.

Direct sales models have recently come under fire in China. Authorities launched a probe into Herbalife rival Nu Skin Enterprises Inc last month after state media published reports that it brainwashed its members. Shares of Nu Skin, Herbalife and rival USANA Health Sciences Inc fell on news of the probe.

"Direct sales groups are well organized and can have a lot in common with other social and political organizations, which is why China is rather wary of them," said Torsten Stocker, Hong Kong-based partner at consultancy firm A.T. Kearney.

Herbalife, which took around 10% of its global sales from China last year, has 200,000 sales representatives in the country using a "unique marketing program" to meet Chinese regulations, it said in its latest annual report.

Growth in China helped boost fourth-quarter net profit 10% to $123.5 million, while revenue rose 20% to $1.3 billion, in line with the company's estimate.

The U.S. firm has also had to fend off criticism about its sales model after activist investor Ackman accused it in December 2012 of running a "pyramid scheme" and took a $1 billion short position in the firm. Short-sellers make money when the stock price of a company drops.

The U.S. firm has always vehemently denied that it operates a pyramid scheme, which is an unsustainable business that typically makes most of its money by recruiting distributors rather than selling products to real customers.

Herbalife, which sells products through a network of independent distributors, reported an adjusted profit of $1.28 per share for the fourth quarter ended December 31, above an expected $1.25 per share according to Thomson Reuters I/B/E/S.

 

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