Herbalife cuts 2015 customer growth in half, blaming database error
Already facing questions about whether its business model is legal, Herbalife suffered another blow Thursday when the company announced it had overstated its worldwide growth in customers and distributors.
The Los Angeles nutritional supplement maker’s shares sank after it detailed how dozens of comments from its executives during conference calls were wrong, most of them exaggerating the growth in its customers or new members.
For example, in a Feb. 25 call, executives said active new members worldwide, excluding China, were up 8.3% for the year — more than double the actual growth rate of 3.4%.
The company blamed the errors on a database that it began using last year.
“The errors do not impact the company’s financial statements in any way,” Herbalife said in a statement. “The cause of the problem has been identified and corrective measures have been put into place.”
Herbalife shares closed at $52.42 on Thursday, down $3.96, or 7%.
The company said the executives’ misstatements were made in quarterly conference calls in August, November and last month.
In another example from last month, John DeSimone, Herbalife’s chief financial officer, had said, “We continue to be encouraged by the improved levels of new member engagement in the U.S. with new members up 15% and active new members up 71% compared to the same quarter 2014.”
The company said Thursday that the increase in active new members in the U.S. was not 71% but 30.7%.
The announcement was the most recent headache for Herbalife, which has been locked in a legal battle with investor Bill Ackman for three years. The billionaire has accused the company of operating a pyramid scheme.
That dispute revolves around the company’s business model of using customers or its members to sell its protein shakes and other supplements.
Ackman says the only way that Herbalife members can make money is by recruiting others — not by selling the company’s products.
By selling Herbalife stock short, Ackman’s hedge fund, Pershing Square Capital Management, bet more than $1 billion that the company’s stock would fall.
Herbalife executives have bitterly contested Ackman’s claims, saying the company’s business model is sound and compares to that of Tupperware or Amway.
Last week, Herbalife said it was in discussions with regulators at the Federal Trade Commission about a possible resolution of the agency’s investigation into its business practices.
The FTC opened a probe of Herbalife in March 2014.