Herbalife shares up on potential FTC deal
Shares of Herbalife (HLF) climbed higher Friday, the day after the nutritional supplement marketer said it was nearing resolution of a federal investigation launched amid allegations the company's business model amounted to a pyramid scheme.
Herbalife shares closed just over 9% higher at $63.62. The stock has risen nearly 36.3% during the last year, despite the repeated allegations made by Bill Ackman, the billionaire hedge fund manager of Pershing Square Capital Management.
The Los Angeles-based company said talks with the Federal Trade Commission, first disclosed in February, "have progressed to an advanced stage, and the range of outcomes now includes litigation or settlement."
If a settlement is reached, the outcome is expected to include "injunctive and other relief as well as a monetary payment with our best estimate of a payment being $200 million," the company said in a statement as it released upbeat first-quarter earnings results.
Herbalife Chairman and CEO Michael Johnson cautioned that "there are a number of open issues," during a Thursday evening conference call with Wall Street analysts.
“We don’t yet have an agreement. What we have is the reasonable possibility of an agreement,” Herbalife CFO John DeSimone said as some analysts sought additional details about the potential settlement. DeSimone declined to discuss the financial and legal calculations behind the potential $200 million settlement estimate.
Injunctive relief can be just as significant as money obtained for consumers, and can be even more influential on a company’s future operations, the FTC said in a statement.
Herbalife’s recent earnings disclosures, including Thursday's financial results, omitted previous references to Department of Justice requests for information about the company’s business practices. Asked by a financial analyst whether the omissions meant the DOJ issue was now in the past, DeSimone said: “I can confirm that the DOJ language has been dropped from our disclosures.”
Fran McGill, a Pershing Square Capital Management spokesman, said the hedge fund had no comment on Herbalife's new disclosures.
Ackman famously made a $1 billion short bet against Herbalife's shares in 2012 when the stock traded around $47 a share. He contended that Herbalife's business model is a pyramid scheme because Herbalife profits by enrolling increasing numbers of new members who sell its nutritional shakes, rather than by selling the products.
Herbalife has repeatedly denied the allegations.
Ackman's financial gamble has proved costly, as the company's stock has managed to recover after an initial, steep selloff following the hedge fund manager's opening salvo and subsequent public attacks.
"I think the government is going to act soon ... and we think the government is going to do the right thing. We think this company has caused tremendous harm." Ackman said during a Monday appearance on CNBC's "Fast Money: Halftime Report."
Saying he has maintained or even increased his $1 billion short bet, Ackman also called on Herbalife employees to leave the company, saying, "this is not going to be a good thing on your resume. I'd go find another job."
The criticism contrasted with the bullish first-quarter earnings results Herbalife issued late Thursday.
Adjusted earnings were $1.36 a share, with sales of $1.12 billion, the company reported. The consensus forecast of financial analysts surveyed by S&P Global Market Intelligence had predicted $1.07 billion in revenue, with adjusted earnings per share of $1.09 cents.
Citing a favorable shift in foreign currency exchange rates, Herbalife raised its 2016 full-year earnings per share guidance to $4.40 to $4.75. The company also boosted its net sales guidance, predicting 1.5% to 4.5% in growth for the year.
"We're encouraged about our business performance," said Johnson, Herbalife's CEO.
Citing a potential FTC settlement, Joe Agnese, a S&P Global Market Intelligence analyst, maintained his "hold" recommendation on Herbalife's stock and raised his price target to $72 a share. "We see valuation benefiting from moderating regulatory risk and improving volumes, despite weakness in Brazil," Agnese wrote in an investor note.
Follow Paste BN reporter Kevin McCoy on Twitter: @kmccoynyc