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Pershing Square Capital Management, L.P.
Who wants to be a Millionaire?
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Disclaimer
Pershing Square Capital Management, L.P. (“Pershing Square”) is an investment adviser to funds that are in the business of buying and selling securities and otherfinancial instruments.
Pershing Square currently has a short position in Herbalife Ltd. (“Herbalife”) common stock. We do not own any options on Herbalife common stock.
Pershing Square will profit if the trading price of Herbalife common stock declines and will lose money if the trading price of common stock of Herbalife increases.
Pershing Square may change its views about or its investment positions in Herbalife at any time, for any reason or no reason. Pershing Square may buy, sell, cover orotherwise change the form or substance of its Herbalife investment. Pershing Square disclaims any obligation to notify the market of any such changes.
The information and opinions expressed in this presentation (the “Presentation”) is based on publicly available information about Herbalife. Pershing Squarerecognizes that there may be non-public information in the possession of Herbalife or others that could lead Herbalife or others to disagree with Pershing Square’sanalyses, conclusions and opinions.
The Presentation includes forward-looking statements, estimates, projections and opinions prepared with respect to, among other things, certain legal and regulatoryissues Herbalife faces and the potential impact of those issues on its future business, financial condition and results of operations, as well as, more generally,Herbalife’s anticipated operating performance, access to capital markets, market conditions, assets and liabilities. Such statements, estimates, projections andopinions may prove to be substantially inaccurate and are inherently subject to significant risks and uncertainties beyond Pershing Square’s control.
Although Pershing Square believes the Presentation is substantially accurate in all material respects and does not omit to state material facts necessary to make thestatements therein not misleading, Pershing Square makes no representation or warranty, express or implied, as to the accuracy or completeness of the Presentationor any other written or oral communication it makes with respect to Herbalife, and Pershing Square expressly disclaims any liability relating to the Presentation orsuch communications (or any inaccuracies or omissions therein). Thus, shareholders and others should conduct their own independent investigation and analysis of
the Presentation and of Herbalife and other companies mentioned.
The Presentation is not investment advice or a recommendation or solicitation to buy or sell any securities. Except where otherwise indicated, the Presentationspeaks as of the date hereof, and Pershing Square undertakes no obligation to correct, update or revise the Presentation or to otherwise provide any additionalmaterials. Pershing Square also undertakes no commitment to take or refrain from taking any action with respect to Herbalife or any other company.
As used herein, except to the extent the context otherwise requires, Pershing Square includes its affiliates and its and their respective partners, directors, officers andemployees.
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Introduction to Herbalife
Source: Herbalife Independent Distributor Presentation (2012)
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Herbalife Ltd. (“HLF”)
1) As of 12-17-12.2) Capital IQ consensus estimate (as of 12-17-12).
Ticker: “HLF”
Stock price: $42.84 (1)
Daily Volume: ~$100mm
Herbalife sells weight-management,nutritional supplement, energy, sportsand fitness, and personal careproducts through its network of 3million independent distributors in 84countries
Capitalization:
Enterprise value: $4.6 billion
Equity market value: $4.8 billion
Recent valuation multiples:
Dividend Yield: 2.8%
‘13e Price-to-Earnings: 9.4x (2)
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Herbalife’s Mission Statement
“Our Mission is to changepeople’s lives by providing thebest business opportunity
and the best nutrition and
weight-management products
in the world”
________________________________________________
Source: http://company.herbalife.com.5
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Is Herbalife a Product Company or a BusinessOpportunity?
Herbalife’s mission is to changepeople’s lives by providing the
best business opportunity indirect selling
Herbalife’s mission is to changepeople’s lives by providing thebest nutrition and weight-
management products in the world
ProductCompany
BusinessOpportunity
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Herbalife:The Product Company
Source: Herbalife Independent Distributor Presentation (2012)
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“In the product area, which we’re veryproud of, we’re continuing to developour science-based nutritional
supplements to support our mission,which is to provide the best nutrition
and weight-management products in
the world.”
–Michael Johnson, Herbalife CEO, 5/2/07
________________________________________________
Source: Herbalife Q1’07 earnings call (5/2/07). 88
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Herbalife has Experienced Remarkable GrowthSince its Formation in 1980
________________________________________________
Note: The chart depicts Herbalife’s Retail Sales. “Re tail Sales” is a Non -GAAP term defined by the Company, which represents the gross sales amount reflected on Herbalife’s invoices to its distributors (at Suggested Retail Price (“SRP”)).
Source: Herbalife Independent Distributor Presentation (2012)
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Herbalife Has Grown to Become One of theWorld’s Leading Consumer Product Companies…
Ticker
YearFounded
CompanyValue
Countries
Revenue
1846
80+
$7.2bn
________________________________________________
(1) Based on Total Enterprise Value as of 4/30/12 (pre-Einhorn). Source: Capital IQ.(2) LTM as of 9/30/12. Source: public company filings.(3) Represents the number of countries where a portion of each company’s products can be purchased. Source: public company filing s.
$2.8bn
1875
160+
$6.7bn
$4.6bn
1913
100+
$11.7bn
$5.5bn
1980
80+
$8.1bn
$3.9bn
(3)
(1)
(2)
NYSE:CHD NYSE:ENR NYSE:CLX NYSE:HLF
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Gross
Margin
KeyBrands
________________________________________________
(1) LTM as of 9/30/12. Source: public company filings.
(1) 43.9% 46.8% 42.4% 80.2%
… But It Is Not a Typical Consumer Product Company
?Has anyone ever purchased an Herbalife product
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$2.4$2.3
$2.3
$1.9
$1.8 $1.7
$1.5$1.4
$1.4
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
Global Retail Sales by Brand ($ in billions)(1)
(2)
________________________________________________
(1) Non-Herbalife brand sales based on 2011 estimates. Source: Sanford Bernstein and Euromonitor.(2) Source: Herbalife 2011 10-K notes Formula 1 was 29% of net sales. To get to Retail Sales, assumes Formula 1 is also 29% of Product Sales. Product Sales were 53% of Retail Sales (excluding literature, promotional and other).
Includes 29% of Shipping & handling revenue in Retail Sales as these expenses have to be passed through at retail for distributors to capture their full markup.
Herbalife’s Top-Selling Product: Formula 1
Formula 1: the only ~$2bn brand nobody’s ever heard of
$1.8bn based onHerbalife’s
disclosure
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What is Formula 1, Herbalife’s Top-SellingProduct at 29% of Sales?
Formula 1 is a nutritional shake mix like Lean Shake, Slim-Fast or Ensure
Company
PowderOffering?
Herbalife GNC Unilever Abbott Labs
Formula 1 Lean Shake Slim-Fast Ensure
Ready-To-DrinkOffering?
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Herbalife Sells ~10 to 20 Times More NutritionPowder than its Competitors
80+ ~100 180* 50+
Ensure
Slim-Fast
Lean Shake
(1)
________________________________________________
(1) Source: public company filings, Euromonitor, sell-side research and Pershing Square estimates.(2) Herbalife products are not sold in stores; however, they are distributed at nutrition clubs. Per the company’s investor prese ntation disclosure, Formula 1 (along with tea and aloe, the other two products
primarily distributed at nutrition clubs) accounted for ~35% of total volume in 2002 (pre nutrition c lubs) and 52% in 2011. This suggests ~1/3 rdof Herbalife’s Formula 1 sales could be to nutrition clubs. (3) In 2011: Herbalife distributed its products in ~80 countries. Ensure was distributed in ~100 countries (source: RBC Capital Markets research 11-12-12). Unilever does not disclose how many countries
Slim-Fast is distributed in, but Unilever products are available for purchase in 180 countries (source: public filings). GNC products are available for purchase in 53 countries (source: public filings).
($mm)
Formula 1
Sold in Stores?
(2)
Countries
(3)
$0$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000Powder Ready-To-Drink
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How is it possible that Herbalifesells six times more nutritionpowder than Abbott Labs (Ensure),Unilever (Slim-Fast), and GNC(Lean Shake), combined?
Perhaps it is cheaper…
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No, Formula 1 is Materially More Expensive thanComparable Nutrition Shake Powders
Retail Price Per 200 Calorie Serving(1)
$0.88
$1.03 $1.04
$1.51
$1.74
$2.87
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
(1) Retail Price per 200 Calorie Serving includes Herbalife's 7% surcharge ("packaging and handling charge"). This charge is fixed despite quantity purchased or if distributors manually pick-up the product.
To create an apples to apples comparison, prices are evaluated on a per 200 calorie serving basis and assume the product is mixed with water.
HLF Source: Herbalife Product Price List - Los Angeles (3-6-12). GNC Source: GNC website (11-19-12). Slim-Fast/Ensure/Genisoy/Naturade Source: Walmart.com (11-19-12). 16
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How does Herbalife price itsother products?
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$0.26
$0.11
$0.08$0.08
$0.06
$0.00
$0.05
$0.10
$0.15
$0.20
$0.25
$0.30
Herbalife’s Multivitamin is more than 3x the Priceof Comparable Products
Retail Price Per Multivitamin Tablet(1)
Average:
$0.08
(1) Retail Price per Tablet includes Herbalife's 7% surcharge ("packaging and handling charge"). This charge is fixed despite quantity purchased or if distributors manually pick-up the product.
HLF Source: Herbalife Product Price List - Los Angeles (3-6-12). Centrum source: Walmart.com (11-20-12). GNC source: gnc.com (11-20-12). One a Day source: drugstore.com (11-20-12). Multi Complete source: CVS.com (11-20-12). 18
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$1.33 $1.33
$3.37
$1.17
$1.07
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
Herbalife’s Niteworks (L-Arginine Supplement) isNearly 3x the Price of Comparable Products
Retail Price Per Serving(1)
Average:
$1.22
(1) Retail Price includes Herbalife's 7% surcharge ("packaging and handling charge"). This charge is fixed despite quantity purchased or if distributors manually pick-up the product.
HLF Source: Herbalife Product Price List - Los Angeles (3-6-12). GNC source: gnc.com (11-24-12). L-Arginine Plus source: l-arginine.com (11-24-12). Cardio-Juvenate source: erasedisease.com (11-24-12).
L-Arginine Advanced source: advancedhealthsupplements.com (11-24-12). 19
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How Can Herbalife Justify Such a MeaningfulRetail Price Premium for its Products?
Is it because Herbalife has proprietary productsfor which there is limited competition?
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No, Herbalife’s Products are Commodities
________________________________________________
(1) Source: HLF 2012 Investor Day presentation.
% of HerbalifeVolume Product Comparable Products
NutritionPowder
32%
Formula 1 Lean Shake Slim-Fast Ensure Genisoy Protein Shake Naturade Total Soy
HerbalTe
a
12%
Herbal Tea Yogi Herbal Tea Lipton Herbal Tea Tazo Herbal Tea Twinings Herbal Tea Celestial Herbal Tea
ProteinPowder
7%
Protein Powder Muscle Milk GNC AMP EAS Whey Protein MET-RX Natural Whey Optimum Nutrition
L'A
rgininePowder
4%
Niteworks GNC L'Arginine 5000 L'Arginine Plus AHS L'Arginine Advanced Cardio Juvenate now L'Arginine Powder
(1)
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How Can Herbalife Justify Such a MeaningfulRetail Price Premium for its Products?
Is it because Herbalife spends so much onadvertising its products?
Is it because Herbalife has proprietary productsfor which there is limited competition?
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Source: Herbalife Investor Presentation (2010)
HLF Compares its Brand Recognition to that ofDisney and Nike
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Disney Nike Herbalife
Yet, Herbalife Spends “de minimis” Dollars onAdvertising
________________________________________________
(1) Represents Disney and Nike three-year average advertising expense.Nike ad spend represented by demand creation expense, which consists of advertising a nd promotion expenses, including cost of endorsem*nt contracts.
(2) “The Company’s advertising costs are de minimis, and therefore these costs are not specifically addressed under ‘Significant Accounting Policies.’” Source: Herbalife Letter to SEC, November2004. As of HLF’s 2011 10-K, advertising costs remain unaddressed in the Company’s Significant Accounting Policies disclosure.
$2.6bn
“de minimis”
Annual Advertising Spend
(1)
“The Company’s advertising costs are de minimis”–HLF Letter to the SEC, November 2004
$2.5bn
(2)
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Surprisingly for a CPG Company, Herbalife Advertises andPromotes its Corporate Name and Logo, But Not its Products
“We generally do not target promotions or advertising at any particularproduct o r brand. Our signi f icant promotions are generally aimed at
generating increased levels of recruiting and retention of distributors.”
–Herbalife Annual Report 2005________________________________________________
Source: Herbalife Investor Presentation (11-16-2011); Herbalife website. 25
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“I think more people are seeing people walk around with
Herbalife on their chest, and approaching them. And
people are now asking us, and that is what I talked aboutthe paradigm shift, what is Herbalife? And that is a newparadigm for our distributors, where someone walks upto them and says, you know, what is Herbalife? Who areyou? We have become in a way a cool company like
almost over night, which is very gratifying andconfidence-building for our distributors.
When they see that name Herbalife everywhere all the
time, they get excited about that, and they get less–what should I say–less cautious about saying who weare, what we are.”
–Michael Johnson, Herbalife CEO, Q2’07 Earnings Call (8-7-07)
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How Can Herbalife Justify Such a MeaningfulRetail Price Premium for its Products?
Is it because Herbalife spends so much moneyresearching & developing its products?
Is it because Herbalife spends so much onadvertising its products?
Is it because Herbalife has proprietary productsfor which there is limited competition?
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Source: Herbalife Website (2012)
Herbalife Claims to Have the Highest R&D Standardsin the Industry
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Herbalife Claims to Have the Highest R&D Standardsin the Industry (Cont’d)
“We’re doing research around the clock in this company”–Michael Johnson, CEO, CNBC’s Mad Money, February 22, 2012
http://www.pscmhlflibrary.com/herbalife-ceo-on-rd/
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Video Clip:
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From the Herbalife 2011 Annual Report:
“For all periods presented, research and development
costs were expensed as incurred and were not material”
But Herbalife’s R&D Spending is “Not Material”
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Source: Herbalife Website (2012)
Herbalife Claims it has “Increased R&D ExpendituresDramatically” Since 2003…
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It’s Not Hard to “Dramatically” Increase R&DExpenditures When they are Less than $2mm/yr
From the Herbalife 2004 Prospectus:
“The Company’s research and development is primarily
performed by outside consultants and is less than $2
million per year”[or less than 0.2% of GAAP Net Sales in 2004]
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Herbalife Claims to be a Product Innovator
Source: Herbalife Investor Presentation (2009)
Herbalife highlights Niteworks, introduced in 2003, as one of
its most significant product innovations
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Herbalife Claims Niteworks was the First NitricOxide Product in the Marketplace
“Dr. Ignarro has basically started the worldon the track of nitric oxide, has made the
world understand that a healthy blood flow
is a healthy body. And we are the first
company to come out with a nitric oxideproduct in the marketplace, it was laughed
at initially and now it is copied.”
–Michael Johnson, Herbalife CEO, 11-28-07
________________________________________________
Source: Herbalife Analyst Meeting (11-28-07).34
Dr. Ignarro is cited more than 100 times in
Herbalife’s SEC filings since the IPO in 2004
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But Herbalife Was Not the First Company toDevelop and Market a Nitric Oxide Product
Unither Pharma introduced a nitric oxide product in 2000
“In December 2000, we expanded our cardiovascular focus when we acquired the
assets and certain liabilities of Cooke Pharma, Inc., the exclusive maker of the
HeartBar® line of arginine-enriched products, which operated as UnitherPharma, Inc. (Unither Pharma), our wholly-owned subsidiary. Arginine is required bythe body to produce nitric oxide. Unither Pharma is the exclusive licensee of patentsentitling it to claim that arginine is critical for maintaining vascular function andcertain other natural functions.”
–United Therapeutics Corporation 2007 10-K
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Niteworks Is Sold Under License from UnitedTherapeutics, which Holds Patents for the Product
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Herbalife Pays United Therapeutics a Royalty toMarket Niteworks
Source: United Therapeutics Press Release (2006)
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Herbalife Has Only One U.S. Patent
The companies below have received approximately the followingnumber of U.S. patents in the healthcare / nutrition area
________________________________________________
(1) Herbalife only has one utility patent assigned to it entitled “Herbal Supplement to Support Weight Loss” (U.S. Patent No. 7,329,419). In addition, Herbalife has onedesign patent for an oral supplement (which appears to be an oral tablet with the Herbalife symbol on it). Source: Sullivan & Cromwell.
228
49
21 21
10
50
100
150
200
250
(1)
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Herbalife Claims its UCLA-led Scientific ResearchDrives “Meaningful Product Differentiation”…
From the 2011 Herbalife Annual Report:
“We believe our focus on nutrition and botanical science and
our efforts at combining our internal research and developmentefforts with the scientific expertise of our Nutrition AdvisoryBoard and the educational skills of the Nutrition Advisory Boardand the resources of the UCLA Lab should result in meaningfulproduct differentiation and give our distributors and consumersincreased confidence in our products.”
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… and Frequently Cites its “Strong Affiliation”with UCLA
“At UCLA, we have a strong affiliation, where we’ve
establ ished the Mark Hughes Cellular and Molecular
Nutr i t ion Laboratory at the Center for Human
Nutrition.”
–Michael Johnson, Herbalife CEO, 11/7/07
________________________________________________
Source: Herbalife Q3’07 earnings call. 40
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Source: Herbalife Independent Distributor Presentation (2007)
… and Frequently Cites its “Strong Affiliation”with UCLA (Cont’d)
41
d F tl Cit it “St Affili ti ”
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… and Frequently Cites its “Strong Affiliation”with UCLA (Cont’d)
“Our product development stems out of our ownresearch and development labs. It comes from
UCLA where we have the Mark Hughes Cellular Lab
there, Universi ty of Mississipp i where we have a
bo tanical research lab in the Thad Coch ran Centerdown there. We have doc tors p laced and sc ient ists
placed throughout the world, nutrition experts.”
–Michael Johnson, Herbalife CEO, 9/3/08
________________________________________________Source: Herbalife at Goldman Sachs Global Retailing Conference (9-3-08).
Herbalife has cited its UCLA affiliation 440 times inSEC filings since its IPO in 2004
42
Y t H b lif h D t d O l $1 5 t th
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From the Herbalife 2011 Annual Report:
“We have also made contributions to the UCLA Lab. We have
invested in this lab since 2002 with total donations ofapproximately $1.5 mill io nwhich includes donations of labequipment and software. UCLA agreed that the donations wouldbe used for further research and education in the fields of weightmanagement and botanical dietary supplements. In addition, wehave made donations from time to time to UCLA to fund researchand educational programs.”
Yet, Herbalife has Donated Only $1.5mm to theUCLA Research Lab
43
A d O l F ti f HLF’ D ti
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From an HLF Letter to the SEC, December 2004
And, Only a Fraction of HLF’s Donations wereEarmarked for Clinical Studies
44
H C H b lif J tif S h M i f l
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How Can Herbalife Justify Such a MeaningfulRetail Price Premium for its Products?
Is it because Herbalife spends so much moneyresearching & developing their products?
Is it because Herbalife spends so much onadvertising its products?
Is it because Herbalife has proprietary productsfor which there is limited competition?
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Why does Herbalife so heavily
promote the R&D and sciencebehind its products?
46
To Inspire Confidence and Create an Aura of
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To Inspire Confidence and Create an Aura ofLegitimacy
“Confidence of our distributors is paramount. It is absolutely thenum ber one thing... We are going throu gh a who le proc ess of making
sure that every single thing that we do ins ide this comp any has
deeper and fur th er substant iat ion for the distr ibuto rs, for the web, for
anybod y in the science indu stry , anybod y in the heal th community ,
to make sure that they understand what this com pany is al l abou t
and what we’re doing.
This is a company that’s out there at the University of Mississippi,Univers i ty of B onn , the Univers i ty of Cal i fornia at Lo s Ang eles,
UCLA. We’re involved in research, development of products, wehave our own research fac i l i ty now in our off ices in Southern
Cali fornia. We have docto rs dedic ated–this nutr i t ion advisory boardthat’s unlike any other company in our field. We meet with experts ona global basis to review, to stu dy, to u nderstand, to bui ld c onf idence
and substantiation in our products on a global basis.”
–Michael Johnson, Herbalife CEO, 12/16/08
________________________________________________
Source: Herbalife Investor Day (12-16-08).47
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Herbalife has paid its NobelLaureate spokesman, Dr. LouisIgnarro and his affiliated
consulting firm more than $15million to help Herbalife promoteits business opportunity to itsdistributors
________________________________________________
Source: Herbalife public filings.48
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Herbalife is Not a Product Company
RealityHLF View■ Herbalife products are truly extraordinary
■ Herbalife products are offered at afair price
■ “Everybody knows Herbalife”
■ “We’re doing research around the clockin this company”
■ Renowned scientists are employed todifferentiate HLF product offering
■ It’s all about the
products
■ Herbalife products are commodities
■ Herbalife products are offered at amassively inflated price
■ Herbalife’s advertising expenditures
are de minimis
■ Herbalife’s R&D expenditures are
not material
■ HLF pays PhD’s to lend credibility toHLF’s business opportunity
■ It’s all about the
business opportunity
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How does Herbalife sell so muchof its unadvertised, commodityproducts at an inflated price?
Herbalife bundles its products
with a business opportunity
50
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Herbalife:The Business Opportunity
“What we’re doing at
Herbalife, is we’re
building the bestbusiness opportunity
on the face of the earth”
–Michael Johnson, CEO
Source: Herbalife Earnings Call (Q1’10)
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What is the Herbalife business
opportunity?
52
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An Opportunity To Be Your Own Boss
Source: Herbalife Independent Distributor Presentation (2009)
53
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An Opportunity To Achieve Financial Freedom
Source: Herbalife Independent Distributor Presentation (2010)
54
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An Opportunity To Create a Growing Annuity
Source: Herbalife Independent Distributor Presentation (2011)
55
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An Opportunity To Improve Your Lifestyle
http://www.pscmhlflibrary.com/profile-of-an-herbalife-chairmans-club-member/
56
“You know, it’s really amazing. I step out of the Ferrari,
the Bentley, or whatever, and p eople go –‘what does
that guy do for a l iv ing? –and I go, ‘I’m an Herbalife
independent distributor,’ and people are absolutely
amazed”
–Doran Andry, Chairman’s Club Member
Video Clip:
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How could a distributor ofnutrition and weight-management
products who is working fromhome possibly achieve thisdegree of wealth and lifestyle?
57
(Here’s a Hint from an Herbalife Distributor
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(Here s a Hint from an Herbalife DistributorMarketing Presentation)
Source: Herbalife Independent Distributor Presentation (2006)
58
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What is a Pyramid Scheme?
________________________________________________
Source: SEC.gov.
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What is a Pyramid Scheme?
In 2002, Dr. Peter J. Vander Nat, a senior economist
at the FTC, defined a pyramid scheme:
60
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Herbalife Is Well Aware of the Law
61
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Why are Pyramid Schemes Illegal?
________________________________________________
Source: Webster v. Omnitrition, 79 F.3d 776, 781 (9 thCic. 1996).
In a pyramid scheme, the money at the top is made fromthe losses of people at the bottom of the pyramid
62
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63
In the next section, we willdemonstrate two facts:
1. Participants in the Herbalife scheme, the distributors,
“obtain their monetary benefits primarily from
recruitment rather than the sale of goods and services
to consumers.”
2. Herbalife inflates the Suggested Retail Price (“SRP”) of
its products and overstates “Retail Sales” in its public
filings to conceal the fact that Recruiting Rewards
earned by distributors are substantially greater than the
Retail Profit they generate
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64
And we will demonstrate that:
Herbalife is a Pyramid Scheme
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65
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How does Herbalife’sbusiness
work?
66
Herbalife Is a Direct Seller:
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Its Products Are Not Sold in Retail Stores
Distributors
RetailCustomers
Distributors purchase productsfrom Herbalife at wholesale
Distributors resell products tocustomers at a markup or use
the products themselves
Distributors purchase products from Herbalife at what HLF deems to
be “wholesale” prices and consume the products themselves(“Internal Consumption”) or resell them at retail prices therebycapturing the markup (“Retail Profit”)
(1)
________________________________________________
(1) Herbalife products are retailed in stores in China due to the country’s MLM laws. (2) Herbalife’s Sales & Marketing Plan defines Customers as “anyone who is not an
Herbalife Distributor who purchases Herbalife products at retail price.” We apply thesame definition to “Retail Customers.”
(2)
67
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Herbalife is a Multi-Level Marketer (“MLM”)
Maria
This means whenDoran recruitsLeslie who recruitsJohn who recruitsSarah who recruitsMike who recruitsLisa who recruits
Bob who recruitsPam who recruitsPedro who recruitsSam who recruitsMark who recruitsMaria who buys
$75 of product fromHerbalife:
Multiple levels ofpeople above Mariareceive commissionsfrom Herbalife
$75
Sam
Pedro
Pam
Bob
Lisa
Mike
Sarah
John
Mark
Doran
Leslie
$10
$7
$8
$5
$5
$5
$2
$2
$2
$1
$1
Retail
Cust.$100?
$100 Retail Sale Example
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How To Become An Herbalife Distributor
Distributors must buy their way in
All independent Herbalife distributorsmust purchase an InternationalBusiness Pack (“IBP”) to enroll
Cost: $55 to $91
Distributors must sign a Distributor Agreement
Herbalife’s Distributor Agreement has 124 pages, 48,000 words
and 215 rules
Herbalife’s non-compete restricts senior distributors from solicitingalternative multi-level marketing opportunities (e.g., seniordistributors can work part-time at GNC but not Avon)
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Distributors Have Two Ways to Earn
Rewards derived from thepurchases of other distributors
(paid by the company)
Profit derived from salesto Retail Customers
(paid by Retail Customers)
RetailProfit
RecruitingRewards
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Distributors Have Two Ways to Earn (Example)
Maria
$75
Sam
Pedro
Pam
Bob
Lisa
Mike
Sarah
John
Mark
Doran
Leslie
$10
$7
$8
$5
$5
$5
$2
$2
$2
$1
$1
Retail
Cust.$100?
RetailProfit
If a Retail Customerpays $100 for the
product, Maria earns$25 Retail Profit
RecruitingRewards
From Maria’s $75purchase, Herbalife
distributes $48
“up the line”
Amt. Pct.
SRP (1) $100 100%
Purchase price (75)Retail Profit $25 25%
Recruiting Rewards $48 48%
(1) Suggested Retail Price ("SRP").
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Two Primary Types of Distributors
Not eligible to receiveRecruiting Rewards
(except 35% and 42% NSLswho are eligible for
Wholesale Commissions)
Purchase product at a 25%,35%, or 42% discount
Non-Sales Leaders(“NSLs”)
Sales Leaders(“SLs”)
RetailProfit
RecruitingProfit
Purchase product at a50% discount
Eligible to receiveRecruiting Rewards
MinimumVolume
Requirement
25%: Must purchase IBP
35%: 500 Volume Points (~$360)
42%: 1,000 Volume Points (~$650)
50%: 4,000 Volume Points (~$2,600)
(1)
________________________________________________
(1) Assumes 1 Volume Point = $1 Retail Sales for simplicity (the actual ratio is a little higher). Cost to achieve the Volume Points includesHerbalife’s 7% surcharge (e.g., 500 Volume Points * 1 VP / RS = $500 Retail Sales; (1 –35% + 7%) * $500 = $360). 72
Herbalife’s Multiple Levels:
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pThe Only Way to Make Money is to Get to the Top
Picture Source: Herbalife Independent Distributor Presentation.
Median AnnualCompensation
% of TotalDistributors
A de minimis fraction of Herbalife distributors earn enough to achieve
the wealth and lifestyle depicted in distributor recruiting presentations
$336,901
$97,303
$19,417
$5,659
$475
0.04%
0.1%
0.5%
0.5%
5.9%
$093.0%
(1)
________________________________________________
(1) The figures above refer to U.S. distributors. “Compensation” is an Herbalife term and does not include income earned by distr ibutors from Retail Profit or from Wholesale Commissions. “Compensation” is gross, not net ofexpenses or taxes. Percentages vary from Herbalife’s Statement of Gross Compensation because not all distributors are included. Source: Herbalife Statement of Average Gross Compensation of U.S. Supervisors (2011).
(2) Only includes “Active” World Team and Supervisors as defined by the Company in its Statement of Gross Compensation of U.S. Su pervisors (only 39% of Sales Leaders are “Active”).
(1)
(2)
(2)
(2)
(2)
Despite the name,“Millionaire Team”distributors only
earn $97k/yr
SalesLeaders
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The Top 1% of Herbalife Distributors Receive 88%
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of the Rewards
Median AnnualCompensation
% of TotalDistributors
(1)(1)
________________________________________________
(1) The figures above refer to U.S. distributors. “Compensation” is an Herbalife term and does not include income earned by distr ibutors from Retail Profit or from Wholesale Commissions. “Compensation” is gross, not net ofexpenses or taxes. Source: Herbalife Statement of Average Gross Compensation of U.S. Supervisors (2011).
(2) Only includes “Active” World Team and Supervisors as defined by the Company in its Statement of Gross Compensation of U.S. Su pervisors (only 39% of Sales Leaders are “Active”).
$336,901
$5,659
$475
$0
$0
$97,303
$19,417
.04%
0.5%
5.9%
10.7%
82.3%
0.1%
0.5%
(2)(2)
(1)
Top 1%
74
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How Distributors Move Up the Chain: Volume Points
Picture Source: Herbalife Independent Distributor Presentation.
In order to advance in the Marketing Plan, distributors must accumulate
Volume Points (“VPs”), a form of “currency” created by Herbalife
Distributors cannotadvance past thisline w/o recruiting
■ One VP is approximately equivalent to $1 of “Retail Sales”
■ Over time this ratio has increased to greater than 1:1, which is away for Herbalife to “increase price” to its distributors
■ Distributors accumulate Volume Points by purchasingproduct or by recruiting others who purchase product
■ To get to the upper levels of the Herbalife chain,distributors must accumulate a special kind of volumeknown as Royalty Override Points (“ROPs”)
■ Royalty Override Points can be generated only when aSales Leader recruits other distributors who also becomeSales Leaders
■ It is impossible for a distributor to get to Active WorldTeam or above without recruiting other Sales Leaders–nomatter how much they sell at retail
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Senior Distributors Encourage Other Distributors to
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Recruit if they Want to Make “Lifestyle Money”
________________________________________________
Source: Herbalife independent distributor audiovisual presentation (11-28-11). Online Business Systems is an Herbalife affiliate overseen by Shawn Dahl (Chairman’s Club).
“If you want some money today, perfect, put together a retail plan. But if you want lifestyle
money, if you want to build that financial independence, you want to lock in that security forlife, you need to recruit. And the other thing you need to do to, be prepared to roll that cash
flow for straight 9 to 12 months. Because you know what, in that short space of time, by
making that commitment, you are going to create a foundation for life. Absolutely. Not just for
yourself, but a legacy, a legacy for your family, for your children, and their children’s children.”
–Herbalife Independent Distributor
77
Senior Distributors Encourage Other Distributors to
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________________________________________________
Source: Herbalife independent distributor presentation (2008).
“Team Build” if they Want a Growing Income Stream
78
Senior Distributors Encourage Other Distributors to
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“Teach to Teach”
79
Source: Herbalife Independent Distributor Presentation (2008)
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Query:What company’s goal is to recruitas many inexperienced sales-
people as possible (on fullcommission with limited oversight)without regard for the ultimatedemand for its products?
80
Top Distributors Earn More Because They Are
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Eligible To Receive Additional Recruiting Rewards
Recruiting RewardsRetail Profit
25%
35%
42%
50%
10%
7-17%
8-25% 5%(3x)
2%
4%
6%
7%
<1%
>1%
5%(3x)
5%(3x)
5%(3x)
5%(3x)
8-25%
8-25%
8-25%
8-25%50%
50%
50%
50% Yes
Yes
Yes
Yes
Yes
Discount WholesaleCommission
RoyaltyOverrides
ProductionBonus
Mark HughesBonus
Vacations/Promotions
81
Herbalife’s Compensation Plan:S ff
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Discount
Wholesale
Commission
RoyaltyOverrides
Production
Bonus
Mark HughesBonus
Vacations/Promotions
Two Ways to Earn, Six Different Names
Distributors may earn profits by purchasing the company’s products at wholesaleprices (which are discounted 25% to 50% from SRP depending on the distributor’slevel within the company’s distributor network) and selling the products to Retail Customers
Distributors receive commissions when other distributors in their Non-Sales Leaderorganizations purchase product directly from the Company at lower discounts (25%/35%/42%)
Distributors who sponsor other distributors and establish their own Sales Leader
organizations (“downlines”) may earn royalties of up to 15% (three active levels,up to 5% each) on the SRP of product purchased by their downline
Senior Sales Leaders may earn Production Bonuses of up to 7% (“infintely deep” in the chain)
on the SRP of product purchased by their downline
A discretionary bonus paid to the most senior Sales Leaders in the aggregate
amount of 1% of Retail Sales
Sales Leaders are eligible to qualify for promotions including vacations and other perqs
The simplest way to understand the various income streams
available to Herbalife distributors is by way of example (next page)
82
Herbalife’s Compensation Plan:T W t E Si Diff t N (E l )
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$75 $10
$7
$8
$5
$5
$5
$2
$2
$2
$1
$1
RetailCust. $100? Discount $25
WholesaleCommission $25
RoyaltyOverrides $15
ProductionBonus $7
Mark HughesBonus $1
Two Ways to Earn, Six Different Names (Example)
25%
35%
42%
83
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Query:
What is the business purpose or
necessity of paying commissions
to 11 different upline distributors
to make a $100 Retail Sale of
commodity products?
84
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Herbalife’s “73%”Payout Ratio
Source: Herbalife Independent Distributor Presentation (2011)
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Herbalife’s Perception:Retail Profit is Greater than Recruiting Rewards
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Retail Profit is Greater than Recruiting Rewards
“RetailProfit”
RecruitingRewards
________________________________________________
Source: Herbalife Investor Day (2009).
________________________________________________
Source: Herbalife Investor Update presentation (5-22-2012).
Herbalife makes this claim in an attempt to convince the
public and regulators that the opportunity for Retail Profits isgreater than that for Recruiting Rewards
88
Reconciling Herbalife’s “73%” Payout Ratio to the P&L
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Reconciling Herbalife s 73% Payout Ratio to the P&L
Herbalife records “Retail Profit” as Distributor Allowances,
which represents a ~50% discount to Retail Sales
________________________________________________
(1) In 2011, Distributor Allowances represented ~47% of Retail Sales in Herbalife’sconsolidated P&L. This is because in some markets Sales Leaders purchase product for less than a 50% discount to SRP.
(1)
89
Herbalife P L
($ mms) 2008a 2011a
Retail Sales $3,811 $5,428
Distributor Allowances (1,779) (2,483)
Product Sales $2,032 $2,945
Shipping & handling revenues 327 510
Net Sales $2,359 $3,455
Cost of sales (458) (680)
Royalty overrides (797) (1,138)
SG&A (772) (1,075)
EBIT $332 $562
Reconciling Herbalife’s “73%” Payout Ratio to the P&L(Cont’d)
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(Cont’d)
Herbalife records Recruiting Rewards in “Royalty overrides,” which
includes Royalty Overrides, Production Bonuses, and the MarkHughes Bonus, but excludes Vacations / Promotions
Vacations /Promotions
are here 90
Herbalife P L
($ mms) 2008a 2011a
Retail Sales $3,811 $5,428
Distributor Allowances (1,779) (2,483)
Product Sales $2,032 $2,945
Shipping & handling revenues 327 510
Net Sales $2,359 $3,455
Cost of sales (458) (680)
Royalty overrides (797) (1,138)
SG&A (772) (1,075)
EBIT $332 $562
Herbalife’s So-Called “Retail Sales”
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Herbalife s So-Called Retail Sales
Source: Herbalife 10-K (2011)
Herbalife determines its so-called “Retail Sales” by assuming
all sales made by distributors are at 100% of Herbalife’sinflated Suggested Retail Prices
Distributor Allowances are based on this fictitious representation of “Retail Sales”
How Would Herbalife’s P&L Look If “Retail Sales”were Recorded Based on Actual Retail Prices?
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were Recorded Based on Actual Retail Prices?
92
Herbalife P L (2011a)
($ mms) As Reported As Adjusted(100% SRP) (65% SRP)
"Retail Sales" $5,428 $3,528
Distributor Allowances
("Retail Profit") (2,483) (583)Product Sales $2,945 $2,945
S&H revenues 510 510
Net Sales $3,455 $3,455
Cost of sales (680) (680)Royalty overrides (1,138) (1,138)
SG&A (1,075) (1,075)
EBIT $562 $562
Decreases
Decreases
Unchanged
(2)
________________________________________________
(1) Illustratively assumes actual retail price is 35% off Suggested Retail Price.
(2) Herbalife refers to Distributor Allowances as “Retail Profit” in its 2009 Investor Day presentation.
(1)
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Royalty overrides paid byHerbalife are unrelated to theultimate sale price for theproduct achieved by distributors
93
Retail Profit varies depending onthe ultimate sale price for theproduct achieved by distributors
A Misleading Chart
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Herbalife’sRepresentation of50 “Retail Profit”
Herbalife’sRepresentation of23% Recruiting Rewards
________________________________________________
Source: Herbalife Investor Day (2009).
A Misleading Chart…
Assumes product is sold at SRP
Assumes 100% of product purchased bydistributors is resold to Retail Customers
Treats Wholesale Commissions asRetail Profit
Excludes Wholesale Commissions
Excludes Recruiting Rewards in SG&A
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Adjustment #1:
Suggested Retail Price ≠Actual Retail Price
Herbalife’s 7% “Surcharge”
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In order for distributors to sell Herbalife products and receive
their full markup (“Retail Profit”), they must pass throughsurcharges and other expenses to Retail Customers
All Herbalife distributors must pay a 7% packaging andhandling charge (“Surcharge”) on the Suggested Retail Price
for products ordered directly from the Company
The Surcharge was instituted in the early 1990s at 5% as a way forthe Company to fund the roll out of the Production Bonus. Overtime, it has increased to 7%
Until 2001, Herbalife accounted for the revenue from theSurcharge as an offset to royalty override expenses
Herbalife s 7% Surcharge
(1)
________________________________________________
(1) In most markets the surcharge is 7%, but in some countries it is in excess of 20%. 96
Herbalife’s 7% “Surcharge” (Cont’d)
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This charge is in addition to the ~4% expense distributors mustpay (of SRP) to have the product shipped if they do not pick up
the product from one of the limited number of Herbalife’s
distribution centers
Unlike the shipping expense which varies depending on the
quantity of product ordered and whether or not distributors
pick up the product, the 7% Surcharge is fixed
Herbalife s 7% Surcharge (Cont d)
97
Herbalife’s 7%+ “Surcharge” (Paraguay)
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Herbalife s 7% Surcharge (Paraguay)
________________________________________________
Source: Google.
7% “Packaging & Handling”
7% “administrative fee”
In some markets, Herbalife has added even more Surcharges
98
Herbalife’s 7%+ “Surcharge” (Bolivia)
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Herbalife s 7% Surcharge (Bolivia)
________________________________________________
Source: Google.
2.5% “Freight charge”
12% “Freight Charge”
7% “Packaging & handling”
99
Herbalife’s 7%+ “Surcharge” (Zambia)
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Herbalife s 7% Surcharge (Zambia)
________________________________________________
Source: Google.
15% “freight”
7% “Packaging & handling”
100
In Order to Realize their Full Markup, Distributors MustPass the Surcharge through to Retail Customers
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Pass the Surcharge through to Retail Customers
% of SRP
Distributors must re-sell here to capturethe 25% Retail Profit
Distributors purchaseproduct here
107%7%
100%
7% 82%
75%
50%
60%
70%
80%
90%
100%
110%
SRP less
Discount
Surcharge SRP less
Adj. Disc.
SRP Surcharge Adj.
SRP
101
Sales Taxes Must Be Passed Through at Retail
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In Canada, distributors must pass through 14% of sales taxes in
addition to the Surcharge to capture full Retail Profit
In California, where Herbalife is headquartered, sales tax is 8.75%
g
________________________________________________
Source: Google.
102
VAT Charges Must Be Passed Through at Retail
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Though VAT varies by country and product, it can be as high as
25% in some markets
g g
________________________________________________
Source: Google.
25% VAT on Formula 1
103
Herbalife Distributors Must Resell Product at aSignificant Premium to SRP to Earn Full Retail Profit
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Significant Premium to SRP to Earn Full Retail Profit
Distributors must re-sell here to capture
full Retail Profit
We conservat ively assume an Ad jus ted SRP of 107%
for the purpo se of our analys is
????
107%+7%+
100%
SRP Surcharge Adj.
SRP
Taxes /
Other
True
SRP
104
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What is the actual retail price at
which Herbalife products are sold?
105
Herbalife Products Sell for ~40% Discounts to AdjustedSRP on Independent Distributor Websites
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p
Formula 1 (750g)
40%
Discount5 websites
Herbal Tea (1.8oz)
39%Discount
3 websites
Herbal AloeConcentrate (16oz)
41%Discount
6 websites
DistributorWebsites
DistributorWebsites
DistributorWebsites
(1) (1) (1)
(1) Based on pricing during Nov-12 and Dec-12. Source: herbalforyes.com, lifemanavip.com, herbalwell.com, goherbalife.com/barbarawilson, freshestherbal.com,
herbaloft.com, and herbalhappy.com. Only one site charged shipping and handling.
As non-distributors, we were able to go online and purchase the
products being distributed today for a ~40% discount to Adj. SRP
$23
$39
Adj. SRP
$24
$14
Adj. SRP
$29
$17
Adj. SRP
106
Formula 1 Sells for a 34% Discount toAdjusted SRP on eBay
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j y
We hired a third-party research company to analyze every availableFormula 1 transaction on eBay from 2007 through 2012. In total, weobtained price data for 39,396 canisters of 750g and 550g Formula 1
Formula 1 (750g)
32%Discount
Formula 1 (550g)
38%Discount
n = 12,750n = 26,646
________________________________________________
Note: Herbalife Adj. SRP represents the weighted average SRP for Formula 1 from 2007 through 2012 (e.g., as of 3-6-12, a 750g canister of Formula 1 had an Adj. SRP of $38.68), which includes Herbalife’sSurcharge but excludes shipping and taxes. eBay price data excludes shipping and taxes. We obtained data for 68,286 total Formula 1 transactions but only used the 39,396 transactions that included container sizedetail and were not bundled with other products. The 34% discount represents the weighted average of the discounts for the 750g and 550g canisters.
Source: ITG.
$37.42
$25.31
Adj. SRP eBay Price
$26.81
$16.49
Adj. SRP eBay Price
107
Niteworks Sells for a 48% Discount toAdjusted SRP on eBay
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j y
We hired a third-party research company to analyze every availableNiteworks transaction on eBay from 2007 through 2012. In total, weobtained price data for 6,277 canisters of 10.6oz and 5.3oz Niteworks
Niteworks (10.6oz)
47%Discount
Niteworks (5.3oz)
51%Discount
n = 880n = 5,397
________________________________________________
Note: Herbalife Adj. SRP represents the weighted average SRP for Niteworks from 2007 through 2012 (e.g., as of 3-6-12, a 10.6oz canister of Niteworks had an Adj. SRP of $101), which includes Herbalife’sSurcharge but excludes shipping and taxes. eBay price data excludes shipping and taxes. We obtained data for 8,505 total Niteworks transactions but only used the 6,277 transactions that included container sizedetail and were not bundled with other products. The 48% discount represents the weighted average of the discounts for the 10.6oz and 5.3oz canisters.
Source: ITG.
$97.47
$51.58
Adj. SRP eBay Price
$52.56
$25.73
Adj. SRP eBay Price
108
GNC’s Lean Shake Sells for a 2% Premiumto Adjusted SRP on eBay
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$24.99 $25.60
Adj. SRP eBay Price
j y
Recognizing the possibility that other comparable products might alsosell at big discounts on eBay, we obtained price data for the sale ofGNC’s Lean Shake from 2007 through 2012 (1,062 canisters sold)
Lean Shake (771g)
2%Premium
n = 1,062
________________________________________________
Note: GNC Adj. SRP represents the actual retail price for Lean Shake in 2012 (source: GNC.com, drugstore.com), which excludes shipping and taxes. GNC also offers an additional 20% discount for Gold Cardmembers; to be conservative, we did not factor this into our retail price. eBay price data excludes shipping and taxes.
Source: ITG.
Lean Shake andFormula 1 (750g)sell at almost theidentical price oneBay. Furtherevidence thatthese productsare commodities
109
Actual Retail Price Summary
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y
Because of the Surcharge and other fees, distributors must resell
products at a substantial premium to SRP in order to captureHerbalife’s promised 25% to 50% Retail Profit
Suggested Retail Price is an artificial, inflated number with norelation to the price at which Herbalife’s products are actually
sold to Retail Customers
Independent distributor websites sell Herbalife productsfor a ~40% discount to Adjusted SRP
eBay data suggest Herbalife’s most popular products sell for a
34% to 48% discount to Adjusted SRP
For the purpose of our analysis, we conservatively assumeHerbalife products are sold for a 35% discount to Adjusted SRP
110
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Adjustment #2:
Internal Consumption ≠Retail Profit
Internal Consumption Refers to Product that isPurchased and Consumed by Distributors
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y
SalesLeaders
Consumers
Non-SalesLeaders
RetailCustomers
InternalConsumption
112
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How much product purchased byHerbalife distributors is actuallyresold to Retail Customers?
113
Herbalife Does Not Track How Much of itsProduct is Resold to Retail Customers
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Herbalife’sPublished Response to DavidEinhorn’sQuestions:
Quest ion #1 from David Einhorn:“First, how much of the sales that you’d make in terms of final
sales are sold outside the network and how much areconsumed within the distributor base?”
Answer :We don’t track this number and do not believe it is relevant to
the business or investors.
________________________________________________
Source: Herbalife 8-K (5-2-12).
114
If Herbalife Doesn’t Track Sales Outside theNetwork, How Many Retail Customers Are There?
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Sales
Leaders
Non-Sales
Leaders
RetailCustomers?
Consumers
115
Herbalife Says that the FTC is not Concernedabout Internal Consumption
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116
From the FTC’s Website…
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In 2009, the FTC published “The Bottom Line About MLM Plans andPyramid Schemes” on its website. Though Herbalife believes the amount of
Internal Consumption “is not relevant to the business or investors,” theFTC highlights it as a red flag for a pyramid scheme
117
Herbalife Refers to All Non-Sales Leaders as “Single-Level,” ThoughMost NSLs are Eligible to Receive Multilevel Wholesale Commissions
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$75 $10
$7
$8
$5
$5
$5
$2
$2
$2
$1$1
RetailCust. $100?
Herbalife refers to thesedistributors as “Single-Level”
(59% of total distributors)
25%
35%
42%
________________________________________________
(1) On average, there were 2.38mm distributors in 2011. Of these, 0.46mm wereSales Leaders (source: Herbalife Regional Key Metrics supplement).Of the Non-Sales Leader distributors: 27% were “Discount Buyers” (22% of
total distributors), 61% were “Small Retailers” (49% of total), and 12% were“Potential Supervisors” (10% of total). Source: HLF 8-K (5-2-12).
(1)
118
Herbalife Says the Majority of its DistributorsSign Up to Become “Discount Buyers”
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Quest ion #1 from David Einho rn:“First, how much of the sales that you’d make in terms of final sales
are sold outside the network and how much are consumed within
the distributor base?”
Answer :We don’t track this number and do not believe it is relevant to the
business or investors.
Herbalife believes the majority of its distributors are discountbuyers, who become distributors in order to purchase their favoriteHerbalife products at a minimum discount of 25 percent.
Herbalife’sPublished Response to DavidEinhorn’sQuestions (Cont’d):
________________________________________________
Source: Herbalife 8-K (5-2-12). 119
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Why would anyone pay $55 to geta 25% discount when Herbalifeproducts are widely availableonline for discounts of more than35%?
120
Herbalife Would Like Others to Believe that its“Discount Buyer” Distributors are Like Costco Members
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“Often people ask well, what does a distributor look like?How do they behave? Last year, when distributorsordered from the Company, 51% of the time, theiraverage order was $100, and they received about a25% discount. So most of the distributors tend to be
discount buyers, similar to joining Costco or some clublike that, where you pay $49, and you get a 25%discount at Herbalife–just like you would buying a clubcard at Costco and enjoying the discount on theproduct.”
–Rich Gou dis , CFO of Herbal ife, Canacco rd Adams
Glob al Grow th Con ference (8-11-2009)
121
We Believe the Majority of Herbalife’s So-Called“Discount Buyers” are, in Fact, Failed Distributors
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Signup Cost
Paperwork
Renewal Fee
Product OfferingRenewal Rate
Everything
$55
~90%
(1)
$55
Product Returns
Membership lost ifproduct returned?
100%Money Back
No
Supplements
$15
~10%
$55-$91
82%Money Back
Yes
48,000 word
Distributor AgreementNone
________________________________________________
(1) Source: Herbalife 2005 Annual Report (the last time Herbalife published the churn rate for its Non-Sales Leader distributors):“For the latest twelve month re-qualification period ending January 2005, approximately 60 percent of our supervisors did not re- qualify and more than 90% of our distributors that are not supervisors turned over.”
(2) Source: Goldman Sachs.(3) Herbalife NSL distributors who purchase from their upline in the “field” have no return policy. Herbalife NSL distributors who purchase directly from the company are entitled to return product to the Company, subject to a 10% restocking fee. The 82%
assumes the surcharge is not reimbursed (e.g., a 25% discount buyer who pays $75 plus a $ 7 Surcharge for $100 of SRP product is entitled to get back $67.5 0 ($82-$7-10%*$75)). In mid-2012, Herbalife eliminated the restocking fee.(4) A 25% distributor can buy a 750g canister of Formula 1 for $29.64 including the Surcharge (Source: HLF Price List–Los Angeles (3-6-12)). Represents 20% Gold Card discount to 771g canister of Lean Shake (Source: GNC website (11-19-12).
(3)
Supplements
$15
~70%
$15
100%Money Back
No
None
(2)
“Discount” Price NA $30 $20(4) (4)
122
Herbalife Admits that Internal Consumption is“Substantial”
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Though Herbal i fe adm its Internal Consumpt ion is su bs tant ial
for any MLM, i t no tes that i t has put in place rules to l imit i t
“The percentage of product of any multi-level marketingcompany consumed by its distributors is substantial. This is notsurprising since consumers who are enthusiastic about theproducts become distributors in order to purchase at a discountand possibly to share and sell the products to others. Inaddition, in order to minimize the risk of product beingaccumulated by distributors, the company has policies in placesuch as the 70% Rule, the Ten Customer Rule and the Buy
Back policy.”
Herbalife’sPublished Response to DavidEinhorn’sQuestions (Cont’d):
________________________________________________
Source: Herbalife 8-K (5-2-12). 123
The 70% Rule and Ten Customer Rule
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________________________________________________
Source: Herbalife Sales & Marketing Plan.124
These Rules Do Not Limit Internal Consumption
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Not all distributors have to comply with these rules.
Only Sales Leaders, those entitled to RoyaltyOverrides, are required to sign certificationsdemonstrating compliance (~19% of total distributors)
Sales Leaders do not receive their paychecks fromHerbalife unless they sign a certificationdemonstrating compliance with these rules
The 70% volume requirement can include sales toone’s downline. By definition, this does nothing to limitInternal Consumption
________________________________________________
(1) Less than half of U.S. Sales Leaders earn royalties, which implies fewer than 10% of Herbalife distributors sign certifications demonstrating compliance with these rules.
Source: Herbalife Statement of Average Gross Compensation of U.S. Supervisors (2011).
(1)
125
Distributors Count as “Retail Customers”
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In some markets, and contrary to Herbalife’s definition
of a “Customer,” distributors can use sales to downlinedistributors to meet the Ten Retail Customers Rule
________________________________________________
Source: Herbalife Australasia Pty Ltd Earnings Certification Form (6-25-11).
126
Herbalife’s Lax Enforcement of Its Rules
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Between 2006 and 2009, Herbalife possibly disciplined
about 10, but fewer than 25, distributors for violating the70% Rule (fewer than 1 out of every 100,000 distributors)
Deposition of Jacqueline Miller in Herbalife v. Ford (2009):
Mr. Stephens : (Ford Couns el)
“Have more than 50 distributors since January of 2006 been disciplined forviolating the 70-percent rule?”
Ms. Mil ler: (Herbalife Emp loy ee)“I don’t believe so.”
Mr. Stephens:“Have more than 25 distributors been disciplined for violating that rule?”
Ms. Mil ler:“I don’t believe so.”
Mr. Stephens:“Have more than 10 distributors been disciplined for violating the 70-percent rule?”
Ms. Mil ler:“That’s possible.”
127
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Internal Consumption Summary
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Herbalife does not track the amount of product that is soldoutside the network, though it could if it wanted to
Contrary to Herbalife’s belief that a large part of its “customer”base is comprised of distributors who sign up to receive adiscount on product purchases, we believe the vast majority of“discount buyers” are nothing more than failed distributors
Herbalife has put rules in place to limit Internal Consumption, butthese rules are ineffective and enforcement is lax
A “substantial” amount of the product purchased from Herbalifeis never sold at retail. For the purpose of our analysis, weconservatively assume that means 30%, though the true amountof Internal Consumption could be meaningfully higher
129
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Adjustment #3:
Wholesale Commissions ≠Retail Profit
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Herbalife’s accounting attemptsto conceal the total amount of
commissions paid to distributorsand increase the amount of so-called “Retail Profit”
131
Herbalife Accounting 101
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When a Non-Sales Leader distributor purchases product directly fromHerbalife, Herbalife accounts for the transaction as if the product had
been purchased from Herbalife by the upline Sales Leader
25% distributor paysHLF $75 (ex fees) forSRP$100 of product
What Actually Happensow Herbalife Accounts For It
HLF pays upline SL
$25 WholesaleCommission
SL pays HLF $50
25% distrib. pays SL$75 for SRP$100 ofproduct and resells
at retail for $100
Herbalife P L
Retail Sales $100
Distributor Allowances (50)
Product Sales $50
132
Herbalife’s Accounting is Misleading:Wholesale Commissions ≠ Retail Profit
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Wholesale Commissions “disappear” in the Distributor Allowances lineitem. This has the effect of reducing the perceived amount of
commissions paid and increases the amount of so-called “Retail Profit”
25% distributor paysHLF $75 (ex fees) forSRP$100 of product
What Actually Happensow Herbalife Accounts For It
HLF pays upline SL
$25 WholesaleCommission
SL pays HLF $50
25% distrib. pays SL$75 for SRP$100 ofproduct and resells
at retail for $100
Herbalife P L
Retail Sales $100
Distributor Allowances (50)
Product Sales $50
Corrected
Herbalife P L
Retail Sales $100
Wholesale Commissions (25)
Distributor Allowances (25)
Product Sales $50133
Wholesale Commissions ≠ Retail Profit(cont’d)
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Herbalife P L
($ mms) 2008a 2011a
Retail Sales $3,811 $5,428Distributor Allowances (1,779) (2,483)
Product Sales $2,032 $2,945
Shipping & handling revenues 327 510
Net Sales $2,359 $3,455
Cost of sales (458) (680)
Royalty overrides (797) (1,138)
SG&A (772) (1,075)
EBIT $332 562
Recall that Herbalife refers to Distributor Allowances as “Retail Profit” inits investor presentations. Distributor Allowances include Wholesale
Commissions, which are a form of Recruiting Rewards
134
Wholesale Commissions ≠ Retail Profit(cont’d)
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$75 $10
$7
$8
$5
$5
$5
$2
$2
$2
$1
$1
RetailCust. $100?
Herbalife accounts for
and refers to this as“Retail Profit”
135
Wholesale Commissions ≠ Retail Profit(cont’d)
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$75 $10
$7
$8
$5
$5
$5
$2
$2
$2
$1
$1
RetailCust. $100?
We believe that all ofHerbalife’s paymentsto distributors areRecruiting Rewards,regardless of what
they are called byHerbalife, and shouldbe accounted for ascommissions in HLF’soperating expenses
136
Wholesale Commissions ≠ Retail Profit (cont’d)
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Other MLMs account for Wholesale Commissions as
operating expenses
“Revenue RecognitionThe Company receives payment by credit card, personal check, orguaranteed funds for orders from independent distributors and makes related
commission payments in the following month. Net sales reflect product salesless the distributor discount of 20 percent to 40 percent of the suggested retailprice. Sales revenue and commission expenses are recorded when themerchandise is shipped, as this is the point title and risk of loss pass. Inaccordance with EITF 01-09, the Company presents distributor royalty andcommission expense as an operating expense, rather than a reduction to netsales, as these payments are not made to the purchasing distributor.”
–Reliv International, Inc. Annual Report (2007)
137
Wholesale Commissions are a Form of Recruiting Profit
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Retail Profit is profit on sales to Retail Customers, not other distributors.
This interpretation is both intuitive and supported by the case law
Wholesale Commissions are substantively no different from royaltyoverrides. They are a form of Recruiting Rewards paid based upon theSRP of product purchased (not sold) by downline distributors
Other MLMs account for Wholesale Commissions as operating expenses
We question how many of Herbalife’s distributors are “discount buyers”
The vast majority of Herbalife’s “discount buyers” are failed distributors
A Belgian court, which found Herbalife to be operating a pyramid scheme,dismissed the notion that distributors can be classified as customers
________________________________________________
(1) FTC v. JewelWay International, No. 97-383, slip op. at 2 (D. Ariz. Dec. 1, 1997):“Under this definition, sales to businesses or corporations connected to the company or to its participants, or to members ofaparticipant’s household, or otherwise not solely for the purpose of sale of the product to a person wi th no connection to the company’s sales force, shall not be considered retail sales.”
(2) Webster v. Omnitrition, 79 F.3d 776, 782 (9 thCir. 1996):“This compensation is facially ‘unrelated to the sale of the product to ultimate users’ because it is paid based on the suggested retail price of the amount ordered from Omnitrition, rather than based on actual sales to consumers.”
(3) Test-Aankoop v. Herbalife International Belgium[Comm. Ct. Brussels], Nov. 23, 2011, AR 2004/7787, No. JC-DC/27 [Jee] (Belg.), slip op. at 11:
“Herbalife confuses the terms ‘distributor’ and ‘consumers…’ From this [distributorship] agreement follows that all distributors in the network of Herbalife, without exception, are independent entrepreneurs and thus should be considered as such.”
(1)
(3)
(2)
138
Quantifying Wholesale Commissions
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Wholesale Commissions
NSL
"Direct"
Retail Wholesale Wholesale % of($mms) Sales (1) Spread Comm. NSLs (2)
Discount Buyers $497 25.0% $124 27.0%
Small Retailers 1,124 15.0% 169 61.0%
Potential Sales Leaders 221 8.0% 18 12.0%
Subtotal $1,842 $311
Herbalife does not disclose the amount of Wholesale Commissions paidto distributors in its SEC filings. We have estimated them below:
139
(1) Wholesale Commissions are only earned when NSL distributors purchase product "directly" from Herbalife. Assumes 35% of 2011 Retail Sales, excluding literature/promotional/other products, were NSL "direct" purchases.
Source: HLF at Citi Global Consumer Conference (5-23-12). NSL "Direct" Retail Sales allocation is based on Herbalife's 2011 distributor composition. Source: HLF 8-K (5-2-12).
(2) For 2011, 27% of Herbalife Non-Sales Leader distributors were "Discount Buyers" (25% Discount), 61% were "Small Retailers" (35% Discount), and 12% were "Potential Supervisors" (42% Discount).
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Adjustment #4:
Recruiting Rewards in SG&A
Herbalife Pays More Than 23% of Retail Sales toDistributors in Recruiting Rewards
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Discount
Wholesale
Commission
RoyaltyOverrides
ProductionBonus
Mark HughesBonus
Vacations/Promotions
Distributor allowances
Distributor allowances
Royalty overrides
Royalty overrides
Royalty overrides
SG&A
~50% of Retail sales
~23% of Retail sales
??% of Retail sales
Where It Shows Up
In Herbalife’sP&L
141
SG&A’s Lockstep Move with Royalty Overrides Provides a Clueas to Where Herbalife Conceals Other Reward Payments
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Herbalife SG&A and Royalty Overrides ($mms)(1)
Variable
Fixed??
$100
$300
$500
$700
$900
$1,100
$1,300
1997a 1999a 2001a 2003a 2005a 2007a 2009a 2011a
SG&A Royalty overrides
________________________________________________
Source: Herbalife public filings. 142
“Distributor Facing” Expenses
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At its 2008 Investor Day presentation, Herbalife disclosed thatapproximately 54% of SG&A was “Distributor Facing” expenses
(1)
________________________________________________
(1) “Distributor Facing” expenses were 16% of net sales in 2007, or $343mm, which represents 54% of reported SG&A ($634mm). Sourc e: Herbalife Investor Day presentation (12-16-08) 143
“Distributor Facing” Expenses are IncentivesSimilar to Royalty Overrides
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From the Investor Day Transcript (12-16-08):
“Of our net sales, we believe that 73% of our business or our cost structure is highlyvariable. Our royalties that we pay distributors, about 36% of sales. Our productcosts, 21%, and distributor facing spending, which is sort of sacrosanct. This is whatDes mentioned earlier, and Michael. This is the last area that we want to touch as itrelates to trying to leverage our margins.
In fact, if anything, what we try to do is over-invest in this area because we dobelieve that complementing our royalty expense with very prudent incentives andpromotion can actually drive incremental ROI on the spending. So, when we look atour essentially fixed overhead, and fixed is relative depending on what time horizon,we look at 12% of our cost structure being essentially fixed.”
–Rich Goudis, CFO, Herbalife
144
A Substantial Portion of Distributor FacingExpenses are Effectively Recruiting Rewards
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Though Herbalife’sSG&A disclosure is limited, we estimate a mean-ingful portion of Distributor Facing expenses are dedicated to vacation
packages, one-time cash bonuses, Herbalife pins and watches, andother similar promotions that can only be gained via recruiting
________________________________________________
Source: Herbalife Independent Distributor presentation (2012). 145
Quantifying Recruiting Rewards in SG&A
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Recruiting Rewards in SG A
($mms) 2011a
SG&A $1,075
% Distributor Facing expenses (1) 54%
Distributor Facing expenses $582
% of Distributor Facing expensesthat are Recruiting Rewards (2) 50%
Recruiting Rewards in SG&A $291
________________________________________________
(1) Assumes 54% of SG&A is Distributor Facing expenses (per Herbalife’sInvestor Day presentation on 12-16-08).(2) Pershing Square assumption.
Using the Company’s 2008 statement that half of “Distributor Facing”
expenses are vacation packages, one-time cash bonuses, Herbalife pinsand watches, and other similar promotions that can only be gained viarecruiting, $291mm of Herbalife’s SG&A in 2011 were Recruiting Rewards
146
Summary:Herbalife Distributors Earn Almost No Retail Profit
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________________________________________________
(1) Distributor Allowances excluding literature, promotional and other. Source: Herbalife 10-K (2011).(2) Source: Herbalife public filings.(3) Assumes 30% of product is self-consumed.(4) Assumes Actual Retail Price is 35% off SRP; applied to 70% of Retail Sales.
(5) Treats Wholesale Commissions as Recruiting Profit.
RealityHLF Representation
Using reasonable assumption s, the typical Herbal i fe distr ibu tor
only earns $5 per month in Retai l Prof i t (before taxes / expenses)
147
2011a 2011a
Distributor Allowances (1) $2,492,300,000 Distributor Allowances (1) $2,492,300,000
Less: Internal Consumption - Less: Internal Consumption (3) (747,690,000)
Less: Actual Retail Price adj. - Less: Actual Retail Price adj. (4) (1,289,631,000)
Less: Wholesale Commissions - Less: Wholesale Commissions (5) (310,616,838)
Retail Profit $2,492,300,000 Retail Profit $144,362,162
Avg distributors (2) 2,380,000 Avg distributors (2) 2,380,000
Avg Retail Profit per Distributor: Avg Retail Profit per Distributor:
Per Year $1,047 Per Year $61
Per Month $87 Per Month $5
Summary:Recruiting Rewards are Greater than Retail Profit
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________________________________________________
(1) 2011a Retail Sales and Distributor Allowances exclude literature, promotional and other. Distributor Allowances percentage is less than 50%, as Herbalife Sales Leaders purchase at less than 50% discounts in certain markets. Source: HLF 10-K.(2) Defined as sales proceeds from sales to non-distributors at Actual Retail Price.(3) Assumes 30% of product is self-consumed.(4) Assumes Actual Retail Price is 35% off SRP; applied to 70% of Retail Sales (@ SRP).(5) Treats Wholesale Commissions as Recruiting Rewards.
(6) Assumes $291mm of SG&A are Recruiting Rewards.
RealityHLF Representation
148
2011a 2011a
Amt. Pct. Amt. Pct.
Retail Sales (@ SRP) (1) $5,264 100% Retail Sales (@ SRP) (1) $5,264 100%
Distributor Allowances (1) $2,492 47% Distributor Allowances (1) $2,492 47%
Less: Internal Consumption - - Less: Internal Consumption (3) (748) (14%)
Less: Actual Retail Price adj. - - Less: Actual Retail Price adj. (4) (1,290) (25%)
Less: Wholesale Commissions - - Less: Wholesale Commissions (5) (311) (6%)
Retail Profit $2,492 47% Retail Profit $144 3%
Royalty overrides (2) $1,138 22% Royalty overrides (2) $1,138 22%
Plus: Wholesale Commissions - - Plus: Wholesale Commissions (5) 311 6%
Plus: Rewards in SG&A - - Plus: Rewards in SG&A (6) 291 6%
Recruiting Rewards $1,138 22% Recruiting Rewards $1,739 33%
Payout Ratio 69% Payout Ratio 36%
% of Payout that is Recruiting Rewards 31% % of Payout that is Recruiting Rewards 92%
($bn)
Summary:Recruiting Rewards are Greater than Retail Profit
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$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
Payout
(per HLF)
Retail Profit:
47%
RecruitingRewards:
22%
Internal
Consumption
SRP ≠
ARP
Wholesale
Commissions
($bn)
SG&A
Rewards
Payout
(actual)
Retail Profit:
3%
RecruitingRewards:
33%
Payout:
69%
Payout:36%
149
“[T]he organization is deemed a pyramid scheme if the partici-pants obtain their monetary benefits primarily from recruit-ment rather than the sale of goods and services to consumers”
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- Dr. Peter J. Vander Nat, Senior Economist at the FTC
Payout(per HLF)
Payout(actual)
Retail Profit:3%
RecruitingRewards:
33%
Percent of Participants’Income from Recruiting Rewards:
31%
Retail Profit:47%
RecruitingRewards:
22% Percent of Participants’Income from Recruiting Rewards:
92%
(1)
________________________________________________
(1)
150
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151
Herbalife’s Compensation Plan IncentivizesDistributors to Recruit Aggressively
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Distributors cannot get to the higher-income, upper levels of theHerbalife chain without recruiting
To get to Active World Team, GET Team, Millionaire Team, President’s Team,or Chairman’s Club, a distributor must accumulate Royalty Override Points,which requires having (recruiting) downline Sales Leaders
Herbalife’s most lucrative rewards (Royalty Overrides, Production
Bonuses, and the Mark Hughes Bonus) are only available to distributorswho have reached the rank of Sales Leader and have recruited SalesLeader’s beneath them
As Sales Leaders recruit, and as they incentivize their recruits to recruit,they become eligible to receive additional recruiting rewards, and theircommissions grow geometrically
Production Bonuses go “infinitely deep” into the distributor’s downline
Wholesale Commissions are only available to distributors who haverecruited Non-Sales Leaders
152
A Distributor’s Ability to Earn Retail Profit viaHerbalife’s Business Opportunity is De Minimis
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We estimate that the typical Herbalife distributor earns less than $10
per month in Retail Profit
Even using Herbalife’s reported “Retail Sales,” the typical distributor onlyearns $87 per month
Furthermore, these figures are gross, not net of distributor expenses, which
we believe to be material
The “wholesale” price paid by distributors for Herbalife productsdoes not allow for meaningful Retail Profits. As a result, adistributor’s only real chance to earn the money promised in
Herbalife distributor presentations is by recruiting
No distributor can achieve “financial freedom,” “generate perpetual income,”or earn enough to buy a Ferrari by simply retailing
153
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Herbalife’s inflated Suggested RetailPrices for its products mask the factthat the Recruiting Rewards earned bydistributors vastly exceed their RetailProfits
154
What Would You Rather Do?
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Recruit friends and family to a business opportunity
Sell an overpriced, unadvertised white powder tostrangers, from whom you are required to obtain
name, address, and purchase details
Retail
Recruit
Or
155
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156
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What other factors might the FTCconsider in determining whether a
company is a pyramid scheme?
157
An Alternative Way to Approach the Question
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In 2004, the FTC issued a Staff Advisory Opinionstating the following:
Simp ly stated:Why do par t ic ipants bu y the produc t?
158
The critical question for the FTC is whether the revenues that
primarily support the commissions paid to all participants are
generated from purchases of goods and services that are not simplyincidental to the purchase of the right to participate in a money-
making venture.
Why Do Senior Distributors Buy Product?To “Pay-for-your-Paycheck”
In 2009 Bruce Roth (former President’s Team member) provided the following
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In 2009, Bruce Roth (former President s Team member) provided the followingdeclaration as part of a legal dispute against Herbalife that alleged that
Herbalife was illegally perpetuating a pyramid scheme
________________________________________________
Source: Declaration of Bruce H. Roth, sworn 5-18-09, in Herbalife Int’l of America, Inc. v. Ford et al., Case No. CV 07 -2529 (U.S.D.C., C.D. Cal.). 159
Why Herbalife Distributors “Pay-for-your-Paycheck”Herbalife’s Compensation Plan Revisited
H b lif ’ ti l i b d t t f l
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Herbalife’s compensation plan is based on two types of volume
Derived from the PersonalVolume of a distributor’s
Sales Leader downline(“organization”)
Derived from a distributor’spersonal purchases and thepurchases of his
Non-Sales Leader downline
PersonalVolume
OrganizationVolume
Personal Volum e is the mon thly vo lum e requirement that
determ ines whether a dist r ibu tor gets their paycheck;
Organizat ion Volum e determ ines the size of th e paycheck
160
Why Herbalife Distributors “Pay-for-your-Paycheck”Herbalife’s Compensation Plan Revisited (Cont’d)
H b lif ’ ti l i b d t t f l
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PersonalVolume
OrganizationVolume
25%
50%
35% 42%
0-5% Royalty; 2-7% Production Bonus
50%
50%
50%
50% No Royalty; 2-7% Production Bonus
0-5% Royalty; 2-7% Production Bonus
0-5% Royalty; 2-7% Production Bonus
“Personal Volume”is not exclusively
personal
Herbalife’s compensation plan is based on two types of volume
161
Why Herbalife Distributors “Pay-for-your-Paycheck”Herbalife’s Compensation Plan Revisited (Cont’d)
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In order to receive Royalty Overrides, Sales Leaders must generate
a set amount of Personal Volumeeach m onth
. This can be achievedby “paying-for-your-paycheck” or by recruiting new NSL distributors
Personal Volume determinesRoyalty Override Earning (“Royalty ”)
PersonalVolume
Requirement(monthly)
________________________________________________
Source: Herbalife Sales & Marketing Plan.162
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In addition, in order to receive Royalty Overrides, Sales
Leaders must generate Organization Volume
Royalty Override Points = (Royalty %) * (Organization Volume)
One Royalty Override Point = ~ $1.00 Royalty Override
163
Why Herbalife Distributors “Pay-for-your-Paycheck”The (not so) Curious Case of Anthony Powell
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In 2000, Jason McDowell (President’s Team member) filed a
lawsuit against Herbalife alleging that the company hadunjustifiably removed a Sales Leader, Anthony Powell, fromhis downline
In order to assess the damages incurred by McDowell for the
loss of Powell’s Organization Volume, the monthly volume ofAnthony Powell was made available as part of discovery
Because Anthony Powell ascended the Herbalife chain fromWorld Team to President’s Team, his Personal Volume
purchasing behavior provides valuable insights into theincentives created by Herbalife’s compensation plan
One Royalty Override Point = ~ $1.00 Royalty Override________________________________________________
(1) McDowell v. Herbalife, No. C00-2011Z (W.D. Wash.), complaint dated October 30, 2000.
(1)
164
The chart below shows Anthony Powell’s monthly Personal Volume from 1996
Why Herbalife Distributors “Pay-for-your-Paycheck”The (not so) Curious Case of Anthony Powell (Cont’d)
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2,000
4,000
6,000
8,000
10,000
Oct-95 May-96 Dec-96 Jun-97 Jan-98 Jul-98 Feb-99 Aug-99 Mar-00 Oct-00
The chart below shows Anthony Powell s monthly Personal Volume from 1996to 2000. You might think it would be driven by the vagaries of retail demand…
Volume
Points
2,500
3,000
5,000
________________________________________________
Source: Affidavit of William Partin (McDowell v. Herbalife, No. 00-2011 (W.D. Wash.)). 165
In order to receive Production Bonuses, GET Team / Millionaire Team /
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In order to receive Production Bonuses, GET Team / Millionaire Team /President’s Team members (collectively, “TAB Team”) must generate a
minimum amount of Personal Volume per month
ProductionBonus %
Personal VolumeRequirement
(monthly)
GET
MillionairePresident’s
20K
30K
50K________________________________________________
Source: Herbalife Sales & Marketing Plan. 166
Powell purchases just enough Personal Volume to earn his
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2,000
4,000
6,000
8,000
10,000
Oct-95 May-96 Dec-96 Jun-97 Jan-98 Jul-98 Feb-99 Aug-99 Mar-00 Oct-00
World Team(no Prod Bonus)
Volume
Points
2,500
3,000
5,000
GET Team(5,000 PV for PB)
Millionaire Team(3,000 PV for PB)
PT(2,500)
Powell purchases just enough Personal Volume to earn hisProduction Bonus (“pay-for-his-paycheck”)
________________________________________________
Source: Affidavit of William Partin (McDowell v. Herbalife, No. 00-2011 (W.D. Wash.)). 167
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Herbalife distributors supposedly meet their Personal Volume
requirements by establishing a base of Retail Customers. IfPowell had a sufficient base of Retail Customers as a GET
Team member to support 5,000 VPs, why did it suddenly
disappear when he reached Millionaire Team?
Per Herbalife’s rules, “the purchase of products primarily as
an attempt to qualify for advancement in the Marketing Plan is
not permitted;” yet, Powell purchases just enough Personal
Volume each month to advance up the chain(1)
________________________________________________
(1) See the Herbalife Sales & Marketing Plan (Rule 18-A Product Distributrion).
168
Why does Powell alternate between 2 500 and 5 000 Personal
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2,000
4,000
6,000
8,000
10,000
Oct-95 May-96 Dec-96 Jun-97 Jan-98 Jul-98 Feb-99 Aug-99 Mar-00 Oct-00
World Team(no Prod Bonus)Volume
Points
GET Team(5,000 PV for PB)
Millionaire Team(3,000 PV for PB)
PT(2,500)
Why does Powell alternate between 2,500 and 5,000 PersonalVolume when he first reaches GET Team?
________________________________________________
Source: Affidavit of William Partin (McDowell v. Herbalife, No. 00-2011 (W.D. Wash.)). 169
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At the GET Team level, it makes sense for Powell to pay for
his royalties. This is why his Personal Volume is at least2,500 Volume Points (“VPs”)
Cost of 5% Royalties
VP requirement 2,500
RS / VP 1.0x
RS requirement $2,500
Discount (50.0%)
Surcharge (1) 6.0%
Cost for VPs $1,400
Pers. Org. Royalty Overrides Pay-for-
Month Volume Volume % Value Cost Royalties?
A B A*B=C D C > D?
Oct-97 2,504 61,874 5.0% $3,094 $1,400 Yes
Nov-97 5,390 98,610 5.0% 4,930 1,400 Yes
Dec-97 2,553 56,698 5.0% 2,835 1,400 Yes
Jan-98 5,627 89,946 5.0% 4,497 1,400 Yes
Feb-98 2,656 48,446 5.0% 2,422 1,400 Yes
Mar-98 5,017 70,883 5.0% 3,544 1,400 Yes
(2)
________________________________________________
Source: Affidavit of William Partin (McDowell v. Herbalife, No. 00-2011 (W.D. Wash.)).(1) Herbalife’s Surcharge was 6% in 1998.(2) Technically, distributors earn Production Bonus off more than just Organization Volume because Org. Volume is only 3 levels and the Production Bonus goes “infinitely
deep.” Powell’s third, fourth, and fifth levels were not disclosed as part of discovery. Assumes Level 3 volume is related to Level 2 volume as Level 2 volume is related toLevel 1 volume.
170
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Powell only “pays-for-his-Production Bonus” when his
Organization Volume is large enough to justify the cost
________________________________________________
Source: Affidavit of William Partin (McDowell v. Herbalife, No. 00-2011 (W.D. Wash.)).(1) Herbalife’s Surcharge was 6% in 1998.(2) Technically, distributors earn Production Bonus off more than just Organization Volume because Org. Volume is only 3 levels and the Production Bonus goes “infinitely deep.” Powell’s third,
fourth, and fifth levels were not disclosed as part of discovery. Assumes Level 3 volume is related to Level 2 volume as Level 2 volume is related to Level 1 volume.
Incr. Cost for Prod Bonus
VP requirement 2,500
RS / VP 1.0x
RS requirement $2,500
Discount (50.0%)
Surcharge (1) 6.0%
Cost for VPs $1,400
If purchases were truly driven by retail demand, Powell’s Personal Volumeand his Organizat ion Volume sho uld b e independent o f one another
(2)
Pay-for-Pers. Org. Production Bonus Prod
Month Volume Volume % Value Cost Bonus?
A B A*B=C D D > C?
Oct-97 2,504 61,874 2.0% $1,237 $1,400 No
Nov-97 5,390 98,610 2.0% 1,972 1,400 Yes
Dec-97 2,553 56,698 2.0% 1,134 1,400 No
Jan-98 5,627 89,946 2.0% 1,799 1,400 Yes
Feb-98 2,656 48,446 2.0% 969 1,400 No
Mar-98 5,017 70,883 2.0% 1,418 1,400 Yes
171
Why Do Mid-level Distributors Buy Product?Answer: Requalification
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From Herbalife’sQ4’06 Earnings Transcript:
172
What does requalification have to do with Retail Sales?
Why Do Junior Distributors Buy Product?Answer: Advancement
Non Sales Leaders are encouraged to work their way up
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Non-Sales Leaders are encouraged to work their way up
the Herbalife chain to get to Supervisor
________________________________________________
Source: Herbalife independent distributor presentation (2012).
(1)
“I want everyone to understand that the most important thing in thisbusiness is to get to Supervisor.” –Shawn Dahl (Chairman’s Club)
________________________________________________
(1) John T artol, (Chairman’s Club member, director of Herbalife), Herbalife Broadcast Network.
“Mentoring your downline to help them reach to Supervisor level –it’s such a large part of building a strong team and it can make or break your success at Herbalife.” 173
Why Do Distributors Buy Herbalife Product?
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Senior distributors purchase product to “pay-for-their-paycheck”
Mid-level distributors purchase product to re-qualify andmaintain their downline “lineage”
Junior distributors purchase product to participate andadvance in the business opportunity
Herbalife’s compensation plan incentivizes orderswithout regard to retail demand
174
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How does Herbalife sell so muchof its unadvertised, commodityproducts at an inflated price?
Herbalife bundles its products
with a business opportunity
175
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Deception
Source: Herbalife Independent Distributor Presentation
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Every Herbalife Distributor Sees the Company’sDisclosure of Distributor Earnings
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178
Herbalife’s Disclosure of Distributor Earnings
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The table in Herbalife’sdisclosure of distributor earnings only includes “Active”Sales Leaders. Inactive Sales Leaders and Non-Sales Leaders are excluded
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Deception #1:93% of Distributors Excluded from the Table
Herbalife excludes from the table the 93% of its U.S. distributor
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Inactive Sales Leaders 60.6% $ 0 10.7%
% of TotalDistributors
0.04%
0.1%0.5%0.5%5.9%
7.0%
Non-Sales Leaders $ 0 82.3%
base earning $0 in “Gross Compensation” (Inactive Sales
Leaders and Non-Sales Leaders)
________________________________________________
(1) Per the Company’s disclosure, Inactive Sales Leaders must not be earning any Royalty Overrides [(39.4%)*($7,348) = $2,900; wh ich implies Inactive Supervisors “Gross Compensation” must be $0].
(1)
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100.0%
93% of Distributors Excluded from the Table (Cont’d)
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The FTC believes the exclusion of zero-earning distributors is
relevant to a determination that an MLM is a pyramid scheme
Source: FTC v. Trek Alliance, No. 02-9270 (C.D. Cal. June 24, 2003).
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Deception #2:“Gross” “Earnings”
Herbalife’s Statement of “Gross” Compensation refers to
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Herbalife s Statement of Gross Compensation refers to
“Average Earnings,” but it is not adjusted for distributor expenses
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“Gross” “Earnings” (Cont’d)
After David Einhorn questioned the company on a conference
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After David Einhorn questioned the company on a conferencecall, Herbalife revised its disclosure to explain that “Earnings”are before expenses. For at least 10 years, Herbalife had notdisclosed this fact to its U.S. distributors
(1)
________________________________________________
(1) Source: Herbalife Statement(s) of Average Gross Compensation of U.S. Supervisors 2002 through 2011.
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Failing to Disclose Expenses
This itemized list of Business Support Materials below comes from the
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ppblog of a former Herbalife Non-Sales Leader distributor showing nearly
$2,000 of expenses in only three months, excluding Herbalife productpurchases. The Company seldom acknowledges these costs exist
http://www.trishparr.com/what-online-business-systems-and-herbalife-don%E2%80%99t-tell-you/
In Jaco bs v Herbal i fe, a class actio n lawsu it of 8,800 dist r ibu tors agains t
the comp any, average Sales L eader expenses were ~$10,000(1)
________________________________________________
(1) Jacobs v. Herbalife International, Inc., Case No. CV-02-1431 (U.S.D.J., C.D. Cal.). Declaration of Michael Rosenbaum, sworn to August 23, 2005.Rosenbaum, managing director of claims administrator, sent 8,822 notices to potential class members and received back 2,701 claims. Submitted claimstotaled $27,345,366 and averaged $10,124 per claimant. The highest totaled $128,241. 184
Deception #3:Cherry-Picking “Active” Leaders
Herbalife uses multiple definitions of the term “Active.” In its
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Herbalife uses multiple definitions of the term Active. In itspublic filings, it broadly defines “Active” Sales Leaders. In itsdistributor earnings disclosure, it uses a more narrow definition
% Active 52.4%
Herbal ife cherry-picks the highest earning “Active” Supervisors fori ts dist r ibuto r earnings disclo sure
________________________________________________
Source: Herbalife Regional Key Metrics supplement. Consistent with this disclosure,Herbalife reported 56,741 Average Active Sales Leaders in North Americafor the year ended 12/31/11 in its 2011 10-K.
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Deception #4:“Over 25% of Distributors reach Supervisor”
Herbalife states that “over 25% of Dist r ibutors reach the rank
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Herbalife states that over 25% of Dist r ibutors reach the rank
of Superv isor and above,” implying a new distributor has aone-in-four chance of being in one of the table’s earningsbrackets (so long as they are “Active”)
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“Over 25% of Distributors reach Supervisor” (cont’d)
Herbalife has made this statement in each of its U.S. distributor
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Herbalife has made this statement in each of its U.S. distributorearnings disclosures since 2003, even though Sales Leaders as a %of total distributors has been lower than 25% since 2009
25.7%
26.6%27.1%
25.6%
27.3%
25.4%
24.0%
23.0%
20.3%
15.0%
17.5%
20.0%
22.5%
25.0%
27.5%
2003a 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011a
% of Total Distributors that are Sales Leaders(1)
________________________________________________
(1) Represents % of total distributors that are Sales Leaders for the entire company. Herbalife does not break out total distributors by region.Source: Herbalife public filings, Herbalife’s Regional Key Metrics supplemental disclosure, and Herbalife Q1’09 Investor Pres entation. 187
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But even this percentage is overstated…
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“Over 25% of Distributors reach Supervisor” (Cont’d)
To determine what % of distributors make Sales Leader:
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Don’t ask: what is the ratio of Sales Leaders to distributors?Ask: what is the ratio of new Sales Leaders to new distributors?
North America Distributor Mix
2009a 2010a
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Total
New Sales Leaders (1) 7,893 10,633 10,569 9,153 8,127 12,558 11,035 9,451 79,419
New distributors (2) 50,738 59,712 58,586 49,642 60,453 71,223 64,662 52,075 467,091
Ratio of New Sales Leaders to New Distributors 17.0%
In 2011, Herbalifestopped disclosingNew Sales Leaders
Only abou t one-ou t-of-s ix dis tr ibuto rs makes Sales Leader
rather than one-ou t-of- four
(1) 2009 Source: Regional Key Metrics (2009); 2010 Source: Herbalife public filings.
(2) Source: Regional Key Metrics (2011).189
Deception #5:Getting to the Top is Much Harder than Advertised
Herbalife overstates a participant’s likelihood of getting to the top
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of the pyramid
________________________________________________
Source: Manual de Entremiento para Distribuidores Herbalife (Buenos Aires, 2001).(1) Translation: “Use, Wear and Talk President’s Team in two years.”
(1)
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Use, Wear, Talk President’s Team in two years
John Tartol, Chairman’s Club member and an Herbalife director, statedin an Herbalife newsletter that Distributors today could make it to the
Getting to the Top is Much Harder than Advertised (Cont’d)
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in an Herbalife newsletter that Distributors today could make it to the
President’s Team in less than three years
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Herbalife entered Ireland in 2000. Ten years later not a single
Getting to the Top is Much Harder than Advertised (Cont’d)
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y g
Irish distributor had even made it to Millionaire Team
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There is almost no turnover at the top
Getting to the Top is Much Harder than Advertised (Cont’d)
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There is almost no turnover at the top
________________________________________________
Source: Herbalife Investor Day Presentation (Dec-2008).
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From 2004 through 2009, we estimate that only one new President’sT b t d f 10 000 di t ib t
Getting to the Top is Much Harder than Advertised (Cont’d)
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Team member was created for every 10,000 new distributors
(1) Source: Herbalife press releases. Uses Q3'09 for EOP 2009 as HLF stopped disclosing this metric in Q3'09.
(2) Source: Herbalife public filings. Excludes China.
(3) Source: Herbalife public filings and Investor Presentations. Excludes China.
(4) Assumes PT retention is 99%. Source: Herbalife Investor Presentation (2008) (President's Team retention disclosed as 100%).
(5) 2004-2005 Source: HLF reported Non-SL churn in its 10-K (100% and 90%). 2009 Source: HLF reported new distributors in its Regional Key Metrics disclosure.
2006-2008: churn assumed to be linear average. Excludes China.
New President’sTeam Members:
661
From 2004–2009:2004a 2005a 2006a 2007a 2008a 2009a
Beginning of Period
President's Team (1) 697 787 886 1,018 1,137 1,220
Non-PT SLs 274,182 298,341 333,114 401,925 450,418 455,638
Sales Leaders (2) 274,879 299,128 334,000 402,943 451,555 456,858
Non-Sales Leaders 796,000 825,000 899,000 1,163,793 1,153,291 1,296,236
Total Distributors (3) 1,070,879 1,124,128 1,233,000 1,566,736 1,604,846 1,753,094
Churn
President's Team (4) (7) (8) (9) (10) (11) (12)
Non-PT SLs (105,244) (120,611) (121,669) (146,072) (177,702) (188,297)
Sales Leaders (105,251) (120,619) (121,678) (146,082) (177,713) (188,309)
Non-Sales Leaders (5) (796,000) (742,500) (767,631) (940,048) (878,367) (927,444)
Total Distributors (901,251) (863,119) (889,309) (1,086,130) (1,056,080) (1,115,753)
Additions
President's Team 97 107 141 129 94 93
Non-PT SLs 129,403 155,384 190,480 194,565 182,922 162,667
Sales Leaders (2) 129,500 155,491 190,621 194,694 183,016 162,760
Non-Sales Leaders 825,000 816,500 1,032,424 929,546 1,021,312 903,899
Total Distributors 954,500 971,991 1,223,045 1,124,240 1,204,328 1,066,659
End of Period
President's Team (1) 787 886 1,018 1,137 1,220 1,301
Non-PT SLs 298,341 333,114 401,925 450,418 455,638 430,008
Sales Leaders (2) 299,128 334,000 402,943 451,555 456,858 431,309
Non-Sales Leaders 825,000 899,000 1,163,793 1,153,291 1,296,236 1,272,691
Total Distributors (3) 1,124,128 1,233,000 1,566,736 1,604,846 1,753,094 1,704,000
New Distributors:6,544,763
÷
=~1 in 10,000
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If one member equals one foot, then the bottom of the pyramid would
Getting to the Top is Much Harder than Advertised (Cont’d)
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The Bottom
of the Pyramid
President’sTeam
Members
1,220
2,472,078
________________________________________________
(1) As of 9/30/08. Source: Herbalife Investor Presentation March 2009.(2) President’s Team includes Chairman’s Club and President’s Team members.(3) The Bottom of the Pyramid includes Non-Sales Leaders, Supervisors and World Team members.(4) Assuming PowerPoint slides are 10 inches wide.
q , pyequal the distance from New York City to Cleveland (~470 miles)
MillionaireTeam 3,353
14,537GETTeam
The bottom of the pyramid would
would require 47 PowerPoint slides
0.6 miles
2.8 miles
470 miles
0.2 miles
(1)
(2)
(3)
(4)
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Getting to the Top is Much Harder than Advertised (Cont’d)
The probabi l i ty of a new d istr ibuto r gett ing to these
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levels is stat ist ical ly ins ign if icant
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Summary: Everything Is Not Really Easy
Source: Herbalife Independent Distributor Presentation (2011)
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There is nothing easy about achieving the wealth and lifestyle new distributors are led tobelieve are possible
Herbalife is effectively a closed system at the very top. The probability of making it toMillionaire Team, which would allow a new distributor to earn an amount commensuratewith Herbalife’s testimonial earnings claims (~$178k), is approximately one in five-thousand
________________________________________________
(1) We analyzed 393 testimonials and earnings claims from editions of Herbalife Today magazines from 1997–2004. The average earnings per year from the claims implied an annual income of$178,000 per year. To earn this amount per year, a new distributor would need to reach Millionaire Team (average income per year: ~$100,000 in 2011). In 2008, there were ~3x more MillionaireTeam members than President’s Team members. Millionaire Team members also have a 99% retention rate, which implies roughly 3 times as many Millionaire Team members were created asPresident’s Team members from 2004 through 2009, putting the odds at 1 out of every 3,400 new distributors achieved Millionaire Team.1 in 5,000 is used because to earn $178,000 per year, a distributor would either need to be a “senior Millionaire Team member” or a “junior President’s Team member.”
(1)
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Indicia of Pyramid Schemes
& Other Legal Issues
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Federal Trade Commission Act–Section 5
Section 5 of the FTC Act provides: “unfair or deceptive acts ori i ff i h b d l d
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practices in or affecting commerce, are hereby declaredunlawful.” 15 U.S.C. § 45
A general, flexible provision that is designed to protect consumers from unfair,misleading or abusive practices
An objective standard: Are the acts or practices at issue likely to misleadconsumers acting reasonably under the circ*mstances?
No requirement to show that consumers were actually confused or misled or thatthey actually relied upon the challenged acts or practices
Enforcement is by the Federal Trade Commission
Remedies can include injunctive and monetary relief, restitution, anddisgorgement. Aims for both remedies and prevention.
State & Non-U.S. Laws
States and non-U.S. jurisdictions regulate consumer protectiond lti l l k ti
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States have their own consumer-protection statutes, some known as ‘Little FTC
Acts’ that track federal standards, and some providing private rights to sue
Many States have specific laws against pyramid schemes
Non-U.S. jurisdictions have consumer protection regimes that regulate pyramidschemes. Some bar MLMs
and multi-level marketing
Little FTC Acts: E.g., N.Y. Gen. Bus. Laws § 349; Tex. Bus. & Com. Code Ann. § 17.46(c); 815 Ill. Comp. Stat. Ann. 505/2.
General consumer-protection statutes: E.g., California. Statutes with private rights of action: e.g., 815 Ill. Comp. Stat. Ann. 505/10a; Conn. Gen.Stat. Ann. § 41-100g; 73 PA Cons. Stat. Ann. § 201-9.2; Tex. Bus. & Com. Code Ann. § 17.50. For a compendium of state anti-pyramid laws, as of1999, see U.S. v. Gold Unlimited, 177 F.3d 472, 483-84 (6thCir. 1999). See F.T.C. v. Equinox International Corp. 1999 WL 1425373 (D. Nev.1999), 1999-2 Trade Cases ¶ 72,704 (Index No. CV-S-99-0969). Canadian Competition Act, R.S.C. 1985, c. C-34 § 55.1 (penalties for ‘scheme of
pyramid selling’); U.K. Fair Trading Act of 1973, c. 41, Part XI § 118 (prohibiting ‘trading scheme’ based upon introduction of other persons who
become participants with prospect of payment for introducing other persons); People’s Republic of China Ban of Operational Activities of PyramidSales (April 1998). India Ministry of Corporate Affairs has proposed (Disguised) Money Circulation Scheme (Banning) rules, 2012 (to curbpyramids conceived as MLMs).
Overlapping roles for Feds, States and non-U.S. gov’ts and private actions
What are “Unfair or Deceptive Practices”?
In a key 1983 Policy Statement on Deception, the FTC explained thatd ti t ti i l th l t
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The Policy Statement on Deception specifically mentions “failure todisclose information regarding pyramid sales” as a situation inwhich the FTC has found deception
202
See FTC Policy Statement on Deception (Oct.14, 1983), appended to Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984); F.T.C. v. Five-Star AutoClub, Inc., 97 F. Supp. 502, 526 (S.D.N.Y. 2000).
1. A representation, omission or practice
2. Likely to mislead reasonable consumers under thecirc*mstances
3. And that is material, meaning likely to affect aconsumer’s choice or conduct with respect to the goodsor services
deceptive acts or practices involve three elements:
Herbalife Acknowledges its Regulatory Risks…
From Herbalife’s 10K –Risk Factors:
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Our network marketing program could be found to be not in compliance with current ornewly adopted laws or regulations in one or more markets, which could prevent us fromconducting our business in these markets and harm our financial condition and operating
results.. . .We are subject to the risk that, in one or more markets, our network marketing program could be
found not to be in compliance with applicable law or regulations. Regulations applicable to networkmarketing organizations generally are directed at preventing fraudulent or deceptive schemes, oftenreferred to as “pyramid” or “chain sales” schemes, by ensuring that product sales ultimately aremade to consumers and that advancement within an organization is based on sales of theorganization’s products rather than investments in the organization or other non-retail sales-relatedcriteria. The regulatory requirements concerning network marketing programs do not include “bright
line” rules and are inherently fact-based and, thus, we are subject to the risk that these laws orregulations or the enforcement or interpretation of these laws and regulations by governmentalagencies or courts can change. The failure of our network marketing program to comply withcurrent or newly adopted regulations could negatively impact our business in a particular market orin general.
…And Tries to Mitigate Those Risks
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“We put together a political action committee inside our
company. I am in Washington every quarter, if not more
than that. I have a list of Senators and Congressman that I
go in and see. . . .”
- Michael O. Johnson, CEOGoldman Sachs 14th Annual Global Retailing Conference
9/5/2007
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Indicia of Pyramid Schemes
E t d E i Cl i
Indicia of Pyramids: Summary
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Exaggerated Earnings Claims
Inflated Prices & Need to Sell to Other Members
Emotional Sales Pitch–the ‘Dream’
A History of Lawsuits
Targeting the Financially Unsophisticated
Complex Compensation Rules
Indicia of Pyramids: Exaggerated Earnings Claims
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Here are some tips that consumers and business might find helpful.
1. Beware of any plan that makes exaggerated earnings claims,
especially when there seems to be no real under-lying product sales orinvestment profits. The plan could be a Ponzi scheme where money
from later recruits pays off earlier ones. Eventually this program will
collapse, causing substantial injury to most participants.
207
Under FTC Act § 5, representations of profit potential are clearly material
Indicia of Pyramids: Exaggerated Earnings Claims
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F.T.C. v. Five Star Auto, 97 F. Supp. 2d at 529
to consumers
Exaggerated Earnings Claims
Actual Herbalife Testimonials–The Formula:
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Source: Herbalife Today for 1997-2004 (as many editions as could be found through online research).
Before Herbalife: After Herbalife:
Data compiled from Herbalife Today magazines (published by HLF)
Exaggerated Earnings Claims
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From 1997-2004, 392 testimonials and earnings claims:Average Earnings/Year: ~$178,000
Median Income/Year: ~$120,000
These represent approximately the top 1/10thof 1% of DistributorsFewer than 1 in 1000 achieve these results
Source: Herbalife Today for 1997-2004 (as many editions as could be found through online research); Herbalife filings and Statement ofAverage Gross Compensation of U.S. Supervisors.
Gross earnings–limited mention of COGS and other business costs.One person said: “We sold everything–even our children’s toys–just to pay for
gasoline and the expenses of moving to California,"after hearing people werehaving success with Herbalife.
Exaggerated Earnings Claims
Herbalife’s More Recent Format –Similar Stories, Fewer Numbers
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1 Million LifetimeAchievement:Health & Wealth(luxury cars,
yachts, exotictravel, etc.)–“more money
than he couldhave imagined”
Source: Herbalife Today, U.S.Edition No. 155 (2012)
How Much Money Can You Expect to Make?
While HLF now uses 1 Million Lifetime stories, high-rankingdistributors continue to use specific dollar testimonials.
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________________________________________________
Source: Online Business Systems Decision Package (2007). Online Business Systems is a dedicated Herbalife marketing company headed by Shawn Dahl, Herbalife Chairman’s Clubmember.
$2,300/moby month 4
$6,000/moby month 13
$10,000/moby month 16
$5,500/moby month ?
$5,000/moby month 10
$7,000/moby month 18
Six-figures/yrby month ?
The probability of success declines over time as more and more entrantsarrive, but most can’t reach the upper levels because the market is saturated
Anybody Can Do It? An Illustration
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Probability of reachingthe top: ~1/1000
Statistically, it is highly unlikely that any new Distributor will cross the gap frombottom to top. The precise statistics require knowing the relative turnover ratesin the top and bottom segments. HLF provides minimal data on these rates
Disclaimer: This is only an illustration of a time series of new entrants v. a static upper group–These are not HLF numbers.
Year 1 Year 2 Year 3
Base turnsover–topstays the
same
Probability of reachingthe top: ~1/2000
Probability of reachingthe top: ~1/3000
Base turnsover–topstays the
same
Illustrativetimeline
The Importance of “Anybody Can Do it”
Webster v. Omnitrition, 79 F.3d 776, 782 (9th Cir. 1996):
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“[T]he very reason for the per se illegality of
the Endless Chain schemes is their
inherent deceptiveness and the fact that the
‘futility’ of the plan is not ‘apparent to theconsumer participant.’”
Anybody Can’tDo it
MLM’s Responsibility for Their Representatives’ Conduct
MLM Sponsors can be held responsible for misrepresentations byindependent contractors
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From FTC v. Five-Star Auto Club, 97 F.Supp. 2d 502, 527 (S.D.N.Y. 2000):
independent contractors
Sponsors can be held responsible
for misrepresentations byindependent contractors.
Principals can be personally liable
See also F.T.C. v. Equinox Int’l, Inc., No. CV-S-990969HBR, 1999 WL 1425373, at *9(D. Nev. Sept. 14, 1999)
State Laws on Earning Claims by MLMs
Five States–Georgia, Louisiana, Maryland, Massachusetts, and Wyoming–specifically regulate or bar earnings claims with respect to multi-level
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specifically regulate or bar earnings claims with respect to multi-level
marketing programs.
Ga. Code § 10-1-414(2); La. Rev. Stat. § 51:1823(1); Md. Code, Bus. Reg. § 14-303; Mass. Gen. L. ch. 93 § 69(e); Wyo. Stat. § 40-3-107.
For example, Massachusetts and Wyoming statutes provide:
“Multi-level distribution companies shall not represent, directly or indirectly, thatparticipants in a multi-level marketing program will earn or receive any stated grossor net amount, or represent in any manner, the past earnings of participants . . .
“Multi-level distribution companies shall not represent, directly or indirectly, thatadditional distributors or sales personnel are easy to secure or retain, or that all or
substantially all participants will succeed.”
Disclaimers of Typicality re Earnings Claims
“Your Results May Vary”
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“The financial testimonials in this
publication reflect the results of
individual Distributors. Your results
may vary.”
In Herbalife Today (‘97-’04),thecompany used what are called“disclaimers of typicality” . . . butnot on every page
FTC Policy Statement on Deception (1983): “Pro forma
statements or disclaimers may not cure otherwise deceptivemessages or practices.”
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FTC Guides on Testimonials
Section 255.2. Consumer Endorsem*nts:
The FTC is concerned that businesses
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Guides Concerning the Use of Endorsem*nts and Testimonials in Advertising (published in Fed. Reg. Vol. 74, No. 198,
amending Rules appearing at 16 CFR Part 255, effective Dec. 1, 2009)
219
make “clear and conspicuousdisclosure of the generally expectedperformance whenever the testimonialis not generally representative of whatconsumers can expect.” 72 Fed. Reg.
2214, 2217 (Jan. 18, 2007).
The FTC’s 2009 Guides Concerning
the Use of Endorsem*nts andTestimonials in Advertising note theCommission’s concern with the
ineffectivenessof “disclaimers oftypicality.”
Testimonials, Earnings Claims & Disclaimers
Based upon its own research,Section 255.2. Consumer Endorsem*nts -
footnote:
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the FTC considers pro formadisclaimers (“Results are not
typical”) unlikely to be effective
to negate testimonials–unless
the advertiser presents empirical
tests showing non-deception
220
“The Effect of Consumer Testimonials and Disclosures on Ad
Communication for a Dietary Supplement,” Report by Manoj Hastak, Ph.D.
and Michael B. Hazis, Ph.D, submitted to the FTC Sept. 30, 2003, availableat http://www.ftc.gov/reports/endorsem*nts/study1/report.pdf; “Effects of
Consumer Testimonials in Weight Loss, Dietary Supplement and BusinessOpportunity Advertisem*nts,” Report by Manoj Hastak, Ph.D. and Michael B.
Hazis, Ph.D, submitted to the FTC Sept. 22, 2004, available athttp://www.ftc.gov/reports/endorsem*nts/study2/report.pdf
Summary on FTC website:http://business.ftc.gov/documents/bus71-ftcs-revised-endorsem*nt-guideswhat-people-are-asking
Testimonials, Earnings Claims & Disclaimers
Herbalife acknowledges that, under the 2009 FTC Guides, its and itsdistributors’ use of income opportunity testimonials may be “significantly
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The FTC has approved revisions to its Guides Concerning the Use of Endorsem*nts and Testimonials in Advertising,or Guides, which became effective on December 1, 2009. Although the Guides are not binding, they explain how the
FTC interprets Section 5 of the FTC Act’s prohibition on unfair or deceptive acts or practices. Consequently, the FTCcould bring a Section 5 enforcement action based on practices that are inconsistent with the Guides. Under therevised Guides, advertisem*nts that feature a consumer and convey his or her atypical experience with a product orservice are required to clearly disclose the results that consumers can generally expect. In contrast to the 1980version of the Guides, which allowed advertisers to describe atypical results in a testimonial as long as they includeda disclaimer such as “results not typical”, the revised Guides no longer contain such a safe harbor. The revised
Guides also add new examples to illustrate the long-standing principle that “material connections” between
advertisers and endorsers (such as payments or free products), connections that consumers might not expect, must
be disclosed. Herbalife has adapted its practices and rules regarding the practices of its independent distributors tocomply with the revised Guides. However, it is possible that our use, and that of our independent distributors,of testimonials in the advertising and promotion of our products, including but not limited to our weightmanagement products and of our income opportunity[,] will be significantly impacted and therefore mightnegatively impact our sales.
221
pp y y g y
impacted and therefore might negatively impact our sales.”
From Herbalife’s 2009-2011 10Ks (emphasis added):
Indicia of Pyramids: Inflated Prices
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3. If a plan purports to sell a product or service, check to see whether
its price is inflated, whether new members must buy costly inventory,
or whether members make most “sales” to other members rather thanthe general public. If any of these conditions exist, the purported
“sale” of the product or service may just mask a pyramid scheme that
promotes an endless chain of recruiting and inventory loading.
222
Indicia of Pyramids: Inflated Prices
Compare Herbalife products with other nutrition products:
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Suggested Retail Price is substantially above market value
De minimusadvertising of products
Limited, if any, proprietary or innovative science
To be successful, Distributors need to recruit and sell to otherDistributors
High-pressure, emotional sales techniques, emphasizing lifestyle, achievingone’s dreams and rapid success are often used.
Indicia of Pyramids: Emotional Sales Pitch–the ‘Dream’
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In Koscot, 86 F.T.C. at 1136-37, the FTC found (¶ 68):
Koscot: Offering “virtually unlimited potential to earn large sums of money in a relativelyshort time . . . [in] the charged atmosphere of an old-fashioned revival meeting, exceptthat the god was Mammon.”
“more money thanhe could haveimagined” –“anybody can do it”
Emotional Sales Pitch–the ‘Dream’
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“Part of our business is entertainment. We entertain our
distributors with opportunity, with dreams, stories, it's all a
part of what this company is.”
--CEO Michael O. JohnsonGoldman Sachs 14th Annual Global Retailing Conference
9/5/2007
Emotional Sales Pitch–the ‘Dream’
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“Michael sets the tone for not only the Company, but, more
importantly, for independent distributors, that there is room at
the top, that this is an aspirational business, and he paints
that picture with kind of dreamy type of goals.”
--CFO Rich GoudisHerbalife Ltd. Investor Day at NYSE
12/16/2008
Indicia of Pyramids: A History of Lawsuits
The FTC recommends considering whether the MLM has a
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history of lawsuits that allege deceptive practices?
Source: FTC publication “Bottom Line about Multilevel Marketing Plans” (Oct. 2009).
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A History of Lawsuits (cont’d)
Additional Significant Herbalife Cases
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●Her Majesty the Queen v. Global Online Systems, Inc.. In 2004, a Canadian Competition Bureauinvestigation revealed that Global Online Systems Inc., a recruiting front led by senior Herbalife distributors,was operating a pyramid selling scheme. Following indictment and conviction, the Federal Court entered aProhibition Order against Global Online Systems, Inc. and its principals Deborah Stoltz and Marilyn Thom.
●Mey v. Herbalife. In 2003, consumers filed a class action in West Virginia, alleging that Herbalife and itsdistributors were violating the Telephone Consumer Protection Act of 1991 by the use of “Herbatel” phone
service and the Herbal Dialer Lead Generation System to auto-dial tens of thousands of consumers.Herbalife discontinued the practice, and defendants settled for $7 million. A similar case was filed 10/2012.
●Ralo v. Zehavi. In 2003, an Israeli judge, deciding a dispute between distributors, noted that Herbalife’s
“method of marketing reminds [me] of the ‘pyramid’ marketing method.” The Court cited FTC warnings
about what to watch for in assessing potential pyramids.
●People of the State of California v. Herbalife International, Inc. In 1986, Herbalife consented to the
entry of a Final Judgment and Permanent Injunction, under which the company promised to desist fromcertain product claims and to pay $850,000 to settle allegations by the Attorney General of the State ofCalifornia that it operated as an “endless chain” and made deceptive medicinal claims. The Final Judgment
included provisions regulating the compensation structure of Herbalife’s marketing program and the
medicinal claims made by Herbalife.
A History of Lawsuits: the Fordcase
In 2009, the California federal court stated that Herbalife appears to paycompensation facially unrelated to sale of products to ultimate users–an
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Memorandum & Order Regarding Cross-Motions for Summary Judgment, No. CV 07-02529, slip op. at 16 (C.D. Cal. Aug. 25, 2009) (quoting Websterv. Omnitrition, 79 F.3d 776, 782 (9th Cir. 1996)). The Ninth Circuit in Omnitritionsaid that compensation unrelated to ultimate-user sales is the“sine qua non” of a pyramid scheme. 79 F.3d at 781 (emphasis added). The marketing system in Omnitrition (found prima facie to be a pyramid) isnearly identical to Herbalife’s plan. While the Ford case was disposed of on other grounds –namely, the parties challenging Herbalife as a pyramidfailed to show that they were victims of the scheme, as opposed to participants who profited from it –the Court’s finding was not disturbed or changed.
essential element of finding of an MLM to be a pyramid.
In Herbalife v. Ford, a group of senior Herbalife distributors, including a former President’s Teammember (top 0.1%)–network insiders who knew how the system works–accused HLF of operatingan illegal pyramid scheme. In 2009, after extensive factual discovery, the Federal Court in California,Herbalife’s headquarters, applied the Ninth Circuit’s Omnitritiondecision to Herbalife and stated:
“Herbalife’s entire business model appears to incentivize primarily the
payment of compensation that is ‘facially unrelated to the sale of the product
to the ultimate users because it is paid based on the suggested retail price of
the amount ordered from [HLF], rather than based on actual sales to
consumers.’” - District Judge Gary A. Feess
Indicia: Targeting People Vulnerable to the ‘Dream’
Pyramids target people with little or no business experience, those mostvulnerable to high-pressure offers of an ‘opportunity,’ but who may not see the
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In Koscot, 86 F.T.C. at 1145, the FTC found (¶ 100) (emphasis added):
risks and costs–and people of similar profiles
In In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1181 (1975), aff’d mem. Sub nom., Turner v. F.T.C., 580 F.2d 701 (D.C.Cir. 1978),
Herbalife targets Latinos, African-Americans, ethnic minorities, theyoung, and stay-at-home moms–focusing on those in financial need
Indicia of Pyramids:Herbalife Targets People of Similar Profile
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From Herbalife’s 2010 Analyst Day Presentation
Peter J. Vander Nat & William W. Keep, Marketing Fraud: An Approach for Differentiating Multilevel Marketing from Pyramid Schemes, 21 J. PUB.POL’Y& MARKETING139, 141 (Spring 2002) (“The lucrative earnings emphasized in promotional messages depend on reaching a high position in
the pyramid, but new participants lack requisite information on the realistic odds of obtaining such a position.”).
Herbalife Targets People of Similar Profile (cont’d)
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“The Latino business is now about 61% of the U.S.
business , 46% up . One of the big things , markets that
we are going to penetrate next year is th e col lege
market.”
--COO Greg ProbertAnalyst Meeting
11/28/2007
Herbalife Targets People of Similar Profile (cont’d)
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“This [soccer] sponsorship supports retailing withsampl ing and act ivat ion opportun i t ies for o ur
distr ibu tors and i t wi l l help in recrui t ing a key target
segment of the U.S. popu lat ion, the stay-at-home-
mom.”
--CEO Michael JohnsonEarnings Conference Call
2/27/2008
Herbalife Targets People of Similar Profile (cont’d)
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“For the Company though, we do see, right. So we do
see the segments th at can pro vide Herbali fe a broader
base. So, for examp le, the Af rican -Am erican init iat ive
that we're doing, it started about three years ago.”
--Amy Greene, VP-IRBarclays Capital Retail and Restaurants Conference
4/24/2012
Herbalife Targets People of Similar Profile
“I'm getting ready to hire somebody that's Korean for the
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US, because that 's a huge oppo rtuni ty for u s. But, again, i thas to be -- have been a distr ib uto r, starts it r ig ht, because
we can't. We can h ire all the Ko reans and -- bu t if -- there's
not a distr ib utor out there that 's real ly taking the bus iness.
Bu t, definitely, I mean when we think abou t Ko rea, I mean,
Ko rea is one of the top c oun tr ies for Herbali fe and LosAngeles has a hug e Korean populat ion, San Francisco, New
York, so, we're targeting that.”
-- Ibi Fleming, SVP and Managing Director, North AmericaBarclays Capital Retail and Restaurants Conference
4/24/2012
Targeting People Vulnerable to the ‘Dream’
“They now are charging people on a daily basis. So if
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you th ink abou t wh ere the money is in the pyramid,and there's more people at the bottom of the pyram id,
especial ly in some of these developing m arkets, a lot
of p oo r, lower m iddle class people. They're creat ing
the oppo rtuni ty for th em to have that access to theHerbal i fe experience. That 's w hat 's driv ing very stro ng
growth in these markets.”
--CFO Rich Goudis
Herbalife Bank of America Consumer Conference9/12/2009
Targeting People Vulnerable to the ‘Dream’
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“. . . If you had to pay $60 at the beginning of eachmonth for that month 's su pply of co f fee, far fewer
people could part ic ipate. But when you pay $2 a day, i t
is such a low price po int, people can afford i t . Peop le
l iv ing hand to mouth or whatever i t may be, so far
more people can afford that.”
--CFO John DeSimoneJefferies Consumer Conference
6/22/2010
Indicia of Pyramids: Complex Compensation Rules
Often, an MLM’s compensation system is complex, with many layers of periodicpurchase and sales requirements, subject to numerous qualifications and
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In F.T.C. v. BurnLounge, No. 2:07-cv-03654, slip op. at 9 (C.D. Cal. July 1, 2011)(footnotes omitted), the Court found it difficult to provide an accurate delineationof the compensation plan . . .
cross-referenced standards.
given the degree of complexity in its composition and the failure of its creators to valueintelligibility, consistency, and useful definitions. Indeed, it would appear thatBurnLounge was attempting to create a labyrinth of obfuscation rather than a readilyunderstood compensation system.
Complex Compensation Rules
Herbalife Sales and Marketing Plan
125 pages of text and forms
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p g
~48,000 words
Numerous Levels of Distributors
Scores of Rules and Subparts
Very little marketing advice
From Sales & Marketing Plan:
From 2012 Herbalife Publication in Mexico
Exaggerated Earnings Claims
Indicia of Pyramids: Conclusion
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Inflated Prices & Need to Sell to Other Members
Emotional Sales Pitch–the ‘Dream’
A History of Lawsuits
Targeting the Financially Unsophisticated
Complex Compensation Rules
Protecting the Consumer
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“In evaluating a tendency or capacity todeceive, it is appropriate to look not at the most
sophisticated, but the least sophisticatedconsumer.” F.T.C. v. Five Star Auto, 97 F. Supp.2d at 532.
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Red Flags
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HLF: Not Your Typical MLM
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Herbalife v. Avon:Herbalife’s Compensation Plan Incentivizes Recruiting
In addition to paying out a higher percentage of Retail Sales than Avon,Herbalife’s commission structure varies from Avon’s in two critical ways:
( ) f “f “
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(i) Herbalife’s royalties are “flat,” whereas Avon’s are “descending;” and(ii) Herbalife has a Production Bonus (“infinity bonus”), Avon only paysRecruiting Rewards three levels deep
Production Bonus (7%) /Mark Hughes Bonus (1%)
FlatDescending
Maximum Distributor Commissions
Avon Avon Herbalife
Downline (% Net Sales) (% Retail Sales) (% Retail Sales)
Level (As Reported) (As Adjusted) (As Reported)
1 15.0% 10.0% 5.0%
2 5.0% 3.3% 5.0%
3 2.0% 1.3% 5.0%
Levels 1 to 3 22.0% 14.7% 15.0%
4 to∞ 8.0%
Total Payout 22.0% 14.7% 23.0%
(1)
________________________________________________
Source: Company filings, Avon Sales Leader Bonus Chart, Herbalife Marketing Plan. Assumes 1 Herbalife Personal Volume point = $1 of Herbalife Retail Sa les.(1) Avon FY 2011 10-K: “Thisprogram [Sales Leadership] generally limits the number of levels on which commissions can be earned to three and continues to focus on individual product sales by Sales Leadership Representatives.”(2) While all Herbalife Supervisors may receive the levels 1-3 Herbalife maximum commissions, only the most senior Avon distributors (Senior Executive Unit Leaders) may receive the levels 1-3 Avon maximum commissions.(3) Avon distributes Recruiting Rewards based on net sales. To make the comparison apples to apples, we assume a 33% discount from Retail Sales to Net Sales.(4) Avon Sales Leader Bonus Chart as of August 2012: “Senior Executive Unit Leaders who are performing at title earn an additional 2% on the Total Unit Leadership Sales of each 1st Generation Executive Unit Leader’s Unit.”
(2)
(3)
(4)
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Herbalife v. Avon:Which System Would You Prefer?
Not all percentages are created equal. The illustrative example below demonstrateswhy the top 1% of Herbalife’s distributors generate 88% of Recruiting Rewards, andwhy Herbalife’s compensation plan incentivizes distributors to recruit dramatically
th th MLM (th i t d i f t t th t )
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more so than other MLMs (there is a greater reward i fyou can get to the top)
Level 1
(7%)($200) + (5%)($200) =
$24$200
‘2 x 2’ ShapedDownline
Level 2
Level 3
Level 4
$400
$800
$1,600
(7%)($400) + (5%)($400) =
$48
(7%)($800) + (5%)($800) =
$96
(7%)($1,600) + (0%)($1,600)
=$112
Total Payout:$280
(10%)($200) =
$20
(3.3%)($400) =
$13
(5%)($800) =
$11
(0%)($1,600) =
$0
Total Payout:$44
Illustrative Compensation Schematic:
(1)
________________________________________________
Source: Company filings, Avon Sales Leader Bonus Chart, Herbalife Marketing Plan. Assumes maximum possiblecommission at each level. Herbalife commission schedule excludes Mark Hughes bonus.(1) Assumes downline distributors generate $100 Retail Sales worth of monthly volume (“Personal Volume”).
For illustrative purposes, assumes the Herbalife Production Bonus is not “blocked.”
You would rathermake 5% here…
…than 15%here
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“Pop-and-Drop”
“We go through phases in new marketplaces where
recruiting is the initial phase of our business and then
t ili i t f ti t th b f it W t t
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retailing comes in to function at the base of it. We try totrain distributors and we’re taking a much more
aggressive stance…
China is 1.3 billion people, you can recruit for a long time
there before we had what was called the classic ‘pop-and-drop’ in that marketplace. So we’re trying to build in
right away a retailing base into that marketplace. I wouldsay initially there is going to be a lot of recruiting, a lot ofbusiness opportunity development.”
–Michael Johnson, Herbalife CEO, 8/6/08
________________________________________________
Source: Herbalife Q2’08 earnings call (8-6-08).249
“So India is not -- it's teetering on the top ten market for
W t i t I di t A d t i
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us. We went into India ten years ago. And we went inand it was a big -- it's called pop and drop. You go in. Alot of distributors come in. They recruit and you get a lotof volume. Those distributors leave the country and youget a big drop.”
–John DeSimone, Herbalife CFO, 3/10/10
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Japan: 1993–2005
($mm)
$600
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RetailSales
$0
$100
$200
$300
$400
$500
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Not separately disclosed after 2005
?
________________________________________________
Source: Herbalife filings.
251
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Spain: 1990–2001
$80
$90
($mm)
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$0
$10
$20
$30
$40
$50
$60
$70
$80
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Not separately disclosed after 2001
?
RetailSales
________________________________________________
Source: Herbalife filings.
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France: 1990–2001
$100
($mm)
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$0
$20
$40
$60
$80
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Not separately disclosed after 2001
?
RetailSales
________________________________________________
Source: Herbalife filings.
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Germany: 1991–2001
($mm)
$175
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Not separately disclosed after 2001
?
RetailSales
$0
$25
$50
$75
$100
$125
$150
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
________________________________________________
Source: Herbalife filings.
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Russia: 1995–2001
$160
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$0
$20
$40
$60
$80
$100
$120
$140
1995 1996 1997 1998 1999 2000 2001 2002
Not separately disclosed after 2001
?
RetailSales
________________________________________________
Source: Herbalife filings.
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1,800
Even Within the N. American Market, It’s a Story of “Pop”Latino Nutrition Clubs vs. “Drop” ‘Core’ N. American Base
Latino Volume Points as % of Americas (1)
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63% (480) 32% (593)
37% (282)
68% (1,146)
300
600
900
1,200
1,500
2004 2009
From 2004–2009, Lat ino market Volume Points as a % of to tal Americas Volume
Points more than doubled, while the ‘Core’ U.S. market appeared to stagnate
VolumePoints
Latino Market Non-Latino Market
________________________________________________
(1) Source: Herbalife Investors Day Presentation dated December 2009 and Herbalife filings.(2) Source: Herbalife filings. Represents “Americas” as defined in Herbalife’s FY2004 10 -K.(3) Source; Herbalife filings. Represents “North America”, “Mexico” and “South/ Central America” as defined in Herbalife’s FY2009 10-K.
(2) (3)
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“We are thirty-two year old company. I think that'sincredibly important for a multi-level marketing sales
company Longevity is an indication of credibility
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company. Longevity is an indication of credibility.
There are companies that get in the industry that haverapid growth and decline. It's called a pop and drop.
They have a rapid growth and then decline quickly also.So, that longevity is an important point for investors froma confidence standpoint into the business model.”
–John DeSimone, Herbalife CFO, 9/6/12
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How has Herbalife stayed in business
for over 30 years?
259
As Herbalife Enters New Regions, ‘Drops’ In MatureMarkets are Masked By the ‘Pops’ of New Markets…
Number of Listed Countries vs. Total Retail Sales
($mm)
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$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
10
20
30
40
50
60
70
80
________________________________________________
Source: Herbalife filings.
($mm)
Numberof
Countries
Total Retail SalesNumber of Listed Countries
260
HLF Re-classified the Countries that Comprise theAmerica’s Region Four Times in the Last Five Years
ClassificationGeographic Presence in The Americas (1)
Year
Country Entered 2005A 2006A 2007A 2008A 2009A
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________________________________________________
(1) Source: Herbalife filings. Southeast Asia portion of South America/ Southeast Asia includes: Australia, New Zealand, Philippines, Thailand, Indonesia, India, Singapore and Malaysia.
The Americas
North America
South America/Southeast Asia
Mexico/ CentralAmerica
South America
South/ Central America
United States 1980
Canada 1982
Jamaica 1999
Dominican Republic 1994
Venezuela 1994
Argentina 1994
Brazil 1995
Chile 1997
Panama 2000
Colombia 2001
Bolivia 2004
Mexico 1989
Costa Rica 2006 NA
Peru 2006 NA
El Salvador 2007 NA NA
Ecuador 2008 NA NA NA
Honduras 2008 NA NA NA
Nicaragua 2008 NA NA NA
Guatemala 2008 NA NA NA
Paraguay 2009 NA NA NA NA
Aruba 2010 NA NA NA NA NA
261
In 2006, South Americawas grouped withSoutheast Asia
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Herbalife may be running out ofgrowth opportunitiesto continue its expansion
262
$50.0
During 2008–2011, Herbalife Entered Fourteen CountriesWith an Average GDP Per Capital of $4,260 (1)
GDP Per Capita
($000s)
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$0.0
$10.0
$20.0
$30.0
$40.0
$
________________________________________________
(1) Source: The World Bank. Based on 2011 estimates.(2) GDP Per Capita for Aruba not available.
Entered Dur ing 2008–2011
Source: Herbalife Independent Distributor Nutrition Club Presentation
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Nutrition Clubs
What is a Nutrition Club?
“Nutrition Clubs, conducted at residential or [brick and mortar]non-resident ia l locat ion s are social gather ings , br ing ing to gether
persons who become members wish ing to focus on g ood
nu tr i t ion and regular exercise in ord er to achieve op t imum
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nu tr i t ion and regular exercise in ord er to achieve op t imum
health.”–Herbalife, Sales & Marketing Plan and Business Rules Manual
Source: Herbalife Independent Distributor Nutrition Club Presentation
“So metrics that are indicative of consumption, our visibility is always a questionin direct selling…And some of the stats on this page were introduced in the last 6months as just evidence of the type of vis ib i l i ty that we have.
So the f irst row looks at the core 3 prod ucts o f the foundat ion of Nutr i t ion
What is a Nutrition Club?HLF’s Proof that Consumption & Retail Sales Exist
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pClubs…In 2002, those 3 products represented 35% of our volume. And last yearand throu gh this year, th i rd q uarter , i t represents m ore than hal f our volum e.
Why? B ecause that shows - because the expansion o f dai ly consum pt ion is
dr iv ing o ur grow th. In dai ly consump t ion, those 3 prod ucts are the produc ts that
are sold in Clubs…And therefore, that growth is indicative of consumptiongrowth. That growth in those 3 core products.”
–John DeSimone, CFO, Investor Presentation, November 14, 2012
266
Source: Herbalife Investor Presentation, November 2012
Source: Herbalife 2012 Investor Day PresentationSource: Herbalife’s Today Magazine
Herbalife Portrays Nutrition Clubs as Vibrant,Retail Channels…
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…Selling Desirable Products to Consumers
All nutrition clubs serve the same three products: aloe water, tea,and Formula 1 as a “meal replacement”
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Source: Herbalife Nutrition Club Presentation byIndependent Distributor
Source: Herbalife 2012 Investor Day Presentation
“W ' d l b i ibl t i t W h
Herbalife Encourages Investors to See the Clubs…
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“We've made clubs visible to investors. We havetaken investors to c lubs. Am y is cons is tent ly put t ing
club tours together. I th ink i t 's im po rtant fo r
som ebody interested in this model to go see a club.
And you ' ll understand that wi th in c lubs , i t is al l
consumption based.”
–John DeSimone, CFO, November 14, 2012
269
…So We Visited Various Nutrition Clubs
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We sent a Pershing Square team member toQueens, NY and Omaha, NE to research nutritionclubs
What follows are photos of nutrition clubs wevisited…
Our Research Revealed a Different Experience
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Our Research Revealed a Different Experience
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Our Research Revealed a Different Experience
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Our Research Revealed a Different Experience
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Our Research Revealed a Different Experience
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Our Research Revealed a Different Experience
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276
Our Research Revealed a Different Experience
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Our Research Revealed a Different Experience
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Our Research Revealed a Different Experience
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Our Research Revealed a Different Experience
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Our Research Revealed a Different Experience
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Our Research Revealed a Different Experience
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Our Research Revealed a Different Experience
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Our Research Revealed a Different Experience
You might notice several things about the Nutrition Clubs weobserved:
N t i i
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No exterior signage
No mention of Herbalife or its logo on the Club exterior
Windows are covered so you cannot see inside
No advertising or promotion
No depiction of product
No indication when the Club is open or closed
Product is poorly prepared and presented
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Herbalife Imposes Many Constraints on its ClubOperators’ Ability to Retail Product (cont’d.)
No product or other promotional
displays visible from the exterior
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286________________________________________________
Source: Herbalife “Sales & Marketing Plan and Business Rules” Manual
No advertising nor attracting any traffic
Must cover windows to ensureinterior of Club is not visible
Must not state, imply, or suggest anyretail products available for purchase
Club Operators may charge membershipfee only to cover operating costs;prohibited from earning Retail Profit
N t t il t t t
Herbalife Imposes Many Constraints on its ClubOperators’ Ability to Retail Product (cont’d.)
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Not a retail store, nor a restaurant
No prices or charges for product servings
Always use disposable cups
“Members”, not others, only allowedto leave premises with limited carry-outsif in “small, unbranded” containers
287________________________________________________
Source: Herbalife “Sales & Marketing Plan and Business Rules” Manual
As the CFO Explains…
“So the clubs first and foremost can't be retailestablishments. They can't be Herbalife signed stores.
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288
establishments. They can t be Herbalife signed stores.
Okay?…The consumer cannot know it is a club until theyhave come inside.
They can't know it has anything to do with Herbalife. So
the windows are blocked, or –you can have no referencewhere somebody walking by will know it is Herbalife.”
- John DeSimone, CFO, Nov. 16, 2011
Query:If the goal is consumption, why does Herbalife make it virtuallyimpossible to generate sales?
Source: Herbalife 2012 Investor Day PresentationSource: Herbalife Today Magazine
The Company’s Depiction of Nutrition Clubs Does NotAdhere to its Own Nutrition Club Rules
Rule 5-C:Must ensure
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Must ensurethe interior ofthe Club is notvisible, by use
of windowcoverings
Rule 1-N:Always usedisposable
cups to servecomplimentary
beverages
Despite the operating constraints placed on its Nutrition Clubs,Herbalife says their competition is McDonald’s
Herbalife Claims its Competition is Fast Food
“You're not going to like my answer on competitionbecause strategical ly we view the com peti t ion as fast
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Note, however, that Herbalife makes no mention of fast foodcompetitors in its SEC filings
“Our competitors include both direct selling companies such as
NuSkin Enterprises, Nature’s Sunshine, Alticor/Amway,Melaleuca, Avon Products, Oriflame, Tupperware and Mary Kay,as well as retail establishments such as Weight Watchers, JennyCraig, General Nutrition Centers, Wal-Mart and retail pharmacies.”
- Herbalife, 2011 10-K
290
because strategical ly we view the com peti t ion as fast
food…It is the steal a meal a day from fast food. It is not togo after other supplement companies. It 's to go after
McDonald's, to go after KFC.”
- John DeSimone, CFO, Sept. 7, 2011
No signage, including external displays of the Company’s name or logo
No advertising or promotion
Must cover windows
Imagine You Operated a McDonald’s, But Were Subject to theFollowing Constraints:
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Must cover windows
Must serve exact same three liquid products to every customer for
breakfast, lunch, and dinner
No “Open / Closed” sign
Not allowed to attract customers or walk-ins
No sales of product servings, only complimentary offerings
Only can charge fees to cover operating costs; product costs explicitly
cannot be recovered
Customers not allowed to carry out food unless in a small, unmarked
container
291
40 66045,000
So How Does HLF Compare to the Competition?Herbalife Appears to Have an Impressive Number of Clubs
Units in Mexico(1)
The number of Nutrition Clubs in Mexico has expanded from 50 to 40,550 inthe last decade and Herbalife has 100x the units of the “competition”
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40,660
408 396 360
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
HLF BK MCD SB
292
________________________________________________
(1) Source: public company filings and news releases. Represents Herbalife nutrition clubs. For QSR restaurants, represents total number of owned and franchised units.
3,000
So How Does HLF Compare to the Competition?One Might Even Conclude HLF has Saturated the Market
Herbalife has one Nutrition Club for every 2,800 people in Mexico, equivalentto the density of the top 15 QSRs in the U.S. combined
Population per Unit(1)
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500
1,000
1,500
2,000
2,500
HLF Top 15 QSRs in U.S. Combined
293
________________________________________________
Source: public company filings, QSR Magazine, CIA World Factbook.(1) Represents Herbalife nutrition clubs per capita in Mexico. For QSR restaurants, represents total number of owned and franchised units per capita in U.S.
GDP per Capita MX: $14,800 US: $49,000
$600
$700
$800
Despite What Seems to be Impressive Growth, HerbalifeDoesn’t Appear to be “Stealing Meals” from Fast Food
“Retail Sales” in Mexico(1)
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$0
$100
$200
$300
$400
$500
1999a 2000a 2001a 2002a 2003a 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011a
294
________________________________________________
(1) Source: Herbalife filings, Burger King. Represents Herbalife “retail” sales.(2) Pershing Square estimates, per Herbalife filings, presentations, and transcripts.
NutritionClubs inMexico (Est.) (2)
0 0 50 500 1,000 6,000 23,000 34,000 28,000 27,000 30,000 30,550 40,550
Why are sales at the “competition” notimpacted by the exponentialexpansion of HLF’s Nutrition Clubs?
The Nutrition Clubs Have Grown Remarkably Rapidly
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“We have always talked about how long it took for thenutr i t ion clubs to ramp up . It’s exponential.So you’reprob ably talking 18 -24 month s ou t into the future t i l l you
see maybe the explicit exponential growth.”
- Michael Johnson, CFO, May 2, 2007
295
Query:What retail business grows exponentially?
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So if Herbalife Nutrition Clubs are not
“stealing a meal a day from fast food” what
are they really doing?
296
What is the Real Purpose of the Nutrition Clubs?
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297
________________________________________________
Source: Nutrition Club Guidelines–Western Australia, September 26, 2010.
What is the Real Purpose of the Nutrition Clubs?
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Shipping & Handling
$11,292
$10,000
$12,000
$3,455
$3,000
$3,500
$4,000
Herbalife’s Shipping & Handling RevenuesAreSurprisingly High…
2011 S&H Revenuesas % of Net Sales (1)
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$180$0
$2,000
$4,000
$6,000
$8,000
Net Sales S&H Revenues
$510
$0
$500
$1,000
$1,500
$2,000
$2,500
$ ,
Net Sales S&H Revenues
Herbal ife charges a 7% Shipping & Handl ing surch arge above ordinary
Shipp ing & Handl ing costs________________________________________________
(1) Source: Company filings. Avon Shipping and Handling Revenues are included in ‘Other Revenue’, which “primarily includes shipping and handling and order processing fees billed to Representatives”.
14.8% of NetSales
1.6% of NetSales
300
…However, Herbalife’s Shipping & HandlingCostsAre Surprisingly Low
Herbalife does not detail Shipping & Handling costs on its Income Statement
In a response letter to an April 11, 2011 SEC inquiry, however, Herbalifedisclosed its Shipping & Handling costs for the fiscal years 2008–2010 (1)
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________________________________________________
(1) Source: Herbalife filings and SEC response letter dated April 21, 2011.
Please tell us where you record shipping and handling costs and provide us with the amounts for each period
presented. If these amounts are not included in costs of sales and are material, please confirm in future
Exchange Act filings you will revise to disclose (i) your policy for recording shipping and handling costs and
(ii) the amounts for each period presented.
Company Response:
We note the Staff’s comment, and in response thereto, respectfully advise the Staff that in Note 2, Basis of
Presentation, under the heading of “Revenue Recognition,” in the notes to consolidated financial statements on
page 104 of the 2010 10-K, we disclose that shipping and handling costs paid by the Company are included in
cost of sales. The shipping and handlings costs for 2010, 2009 and 2008 were $58 million, $49 million and $48
million, respectively.
Source: Herbalife Response Letter to SEC (2011)
Based on Herbalife’s SEC correspondence, its Shipping & Handlingco sts as a percentage o f Net Sales is 2.1%, or 1.3% o f Retai l sales (1).
301
As Such, Herbalife’sShipping & Handling ProfitAccounts For $339mm of Its Total Operating Income
($mm)
Revenues: $397$400
OperatingIncome: $388
2010a
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________________________________________________
(1) Source: Herbalife filings and SEC response letter dated April 21, 2011.
Costs: $58$0
$50
$100
$150$200
$250
$300
$350
Shipping andHandling
Operating Income
S&H Profit:
$339
S&H Profit:
$339
302
7.5%
9.5%10.0%
S&H Costs Typically Account for 6–9% of Net Sales ofConsumer Product Companies
S&H Costs as % of Net Sales (1)
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2.1%
5.9%
0.0%
5.0%
Herbalife Tupperware Colgate Avon
In add it ion , Herbalife’spro ducts are typical ly s old at a 50% dis coun t to SRP,
whereas many o f i ts com pet i tors sel l their produ cts at a 30–40% discount
________________________________________________
(1) Source: Company filings. Based on 2011 estimates; Herbalife reflects 2010 data, as disclosed in SEC correspondence dated April 21, 2011.303
However, Herbalife’s Products are RelativelyHeavy and Expensive to Ship
GenerallyHeavier
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GenerallyLighter
304
40
4450
Herbalife Also Has a More Limited Logistics Footprint ThanThat of Similarly-Sized Consumer Product Companies
Disclosed Number of Properties(1)
Herbalife has only three company operated distribution centers of 150ksq. ft or less each
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5
3234
40
10
20
30
40
Herbalife Energizer Church and Dwight Ralcorp Clorox
305
________________________________________________
(1) Source: Company filings. For Energizer, Church & Dwight, Ralcorp and Clorox, represents only disclosed production/ manufacturing, distribution and warehouse facilities, which are a subset of total.305
HLF has heavier products at a given price point:Peers havesignificantly higher S&H costs despite selling products that arecheaper to ship
Why Are Herbalife’s Shipping & Handling Costs So Low?
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HLF has a limited company-operated manufacturing footprint
HLF has fragmented distribution:approximately 3 million
independent distributors located in 84 countries (1)
HLF uses expensive outsourced shipping:outsourced shippingthrough FedEx, a relatively expensive distribution form
HLF products have ‘fast-moving’ consumption patterns:frequentshipments given customer base and move toward “everydayconsumption”
________________________________________________
(1) Source: Herbalife FY 2012 Q3 10-Q..306
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Product Buyback
Herbalife’s Primary Evidence that Retail Activity Exists isthe Fact that Product Returns are Low (0.4% of Retail Sales)
(1)
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- Charles Patterson, Herbalife Attorney
________________________________________________
(1) Returns were 0.4% of Retail Sales in 2011. Source: Herbalife Investor Presentation (May 2012).(2) Herbalife International of America v. Ford, No. 2:07-cv-02529, Hearing Transcript at 16-17 (C.D. Cal. June 2, 2009).
(2)
308
Herbalife’s ‘buyback’ policy is
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Herbalife s buyback policy iseffective at limiting productreturns. Therefore, we believe the
0.4% return percentage is not auseful indicator of Retail Sales
309
A meaningful amount of product is purchased by Non-Sales Leadersfrom Sales Leaders in the “field,” not directly from the company, andis not eligible to be returned to Herbalife
Herbalife’s buyback policy permits the company to deduct recruitingd d t d d t t ti l (“ l b k”)
Herbalife’s 0.4% Return Percentage Does NotNecessarily Indicate Retail Activity
(1)
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rewards earned on returned product retroactively (“clawback”)
This clawback gives Sales Leaders an incentive to discourage their downlinefrom returning product to Herbalife
In many cases, Sales Leaders are better off repurchasing product from theirdownline rather than allowing them to return it to Herbalife
Herbalife’s buyback policy is not a 100% cash back guarantee
A non-refundable Surcharge and a 10% restocking fee mean that SalesLeaders only get 79% of their money back on returned product
To return product to the company, distributors are required toresign, forfeiting their hard-earned downline forever
________________________________________________
(1) Products are only eligible for return to the company “if the products were purchased from Herbalife.” (Source: Herbalife Sale s & Marketing Plan); “Purchases directly from the company –of that 82%, a lot of people neverpurchase from the company. So they sign up to be a distributor from their sponsor, but they still buy product from the sponsor… Again, a million of our distributors don’t order directly from the company.” (Source: JohnDeSimone, CFO, Herbalife at the Citi Global Consumer Conference (5-23-12)).
(2) E.g., a Sales Leader who pays $50 plus a $7 Surcharge for $100 of SRP product is entitled to get back $45 ($57-$7-10%*$50). In mid-2012, after David Einhorn questioned the company, Herbalife eliminated the restocking fee.
(2)
310
Distributors are encouraged to sell to friends and family
Herbalife encourages new distributors to sell product to friends and family whomay be reluctant to return product even if they are not using it
Distributors are encouraged to “Use, Wear, Talk”
Herbalife’s 0.4% Return Percentage Does NotNecessarily Indicate Retail Activity (Cont’d)
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Distributors are encouraged to Use, Wear, Talk
Herbalife pushes new distributors to create their own personal testimonial byusing their newly purchased Herbalife products. Only unopened product can bereturned
Trend toward smaller order sizes reduces likelihood of returns
Distributors who buy in smaller quantities are less likely to go through theenormous effort required to return product. They are also more likely to sampleand use a higher percentage of the product they purchase, thereby making itineligible for return
Returns are reported as a percent of Retail Sales not Product Sales
Herbalife’s return percentage would be twice as high if the company reportedreturns as a percent of GAAP Product Sales
311
To return product, distributors are required to producelengthy sales documentation, in part to verify the 70% Ruleand Ten Customer Rule certifications
Herbalife Documentation Requirements PreventDistributors from Returning Product
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Limited distributor sophistication and the financial incentive to falsify
certifications make it likely that many distributors lack the properrecords to return product
Equinox, which
was found to be
a pyramid
scheme, had asimilar policy:
________________________________________________
(1) FTC v. Equinox International Corp., No. 990969HBR, 1999 WL 1425373, at * 8 (D. Nev. Sept. 14, 1999).
(1)
312
Distributor Frustration
Distributors find Herbalife’s Inventory Repurchase conditions sorestrictive that they don’t even bother to return product:
Deposition of Bruce Roth (Former Distributor):
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Herbalife International of America, Inc., v. Robert E. Ford and Julia A. Ford, Et, Al.,
313
And In Some Countries, Herbalife Does Not EvenHave a Return Policy…
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Existence Of a Buyback Policy Is Not a Safe Harbor
Amway’s buyback policy was an important consideration in the court’s decisionthat Amway was not a pyramid scheme; however, courts have later clarified thatthe policy must be effective and enforced to be a relevant defense
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Webster v. Omnitrition, 79 F.3d 776, 784 (9thCir. 1999).
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Compared to Amway, HLF’s Buyback Policy Does NotAdequately Protect Distributors From Losses
(1) Herbalife’s restocking fee is 10%; Amway’s was 5%
A cou rt found that a 10%
restock ing fee is a largeenough to burden
A cou rt found that a 10%
restock ing fee is a largeenough to burden
Courts h ave establ ished
that a 10% restoc king feeis large enough to burden
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(2) HLF’s buyback policy has a 12-Month Expiration; Amway had none
dist r ibutors w i th a
mater ial non-refundable
investment
dist r ibutors w i th a
mater ial non-refundable
investment
A cou rt ruled that t ime
l imi ts on produc t returns
sign i f icant ly increasedistributors’ financial risk
distr ib utors w ith a mater ia l
non -refundable expense
Webster v. Omnitr i t ion, 79 F.3d 776, 784 (9th Cir. 1999).
FTC v. Equinox Internatio nal, Corp., No. 990969HBR, 2008WL 1425373, at * 8 (D. Nev. Sept. 14, 1999).
316
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How Much Harm Has HerbalifeCaused
Let’s Revisit:Why are Pyramid Schemes Illegal?
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Source: Webster v. Omnitrition, 79 F.3d 776, 781 (9 thCic. 1996).
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In a pyramid scheme, the money at the top is made fromthe losses of people at the bottom of the pyramid
How Much Financial Harm Has Herbalife Caused?
Number of People Harmed
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X
Net Losses per Person
Total Net Losses
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How Many Sales Leaders Have Failed?
Sales Leaders join Herbalife to participate in the businessopportunity, not to consume the product
Si 1980 ti t th t 1 9 S l L d ( Chi ) h
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Since 1980, we estimate that ~1.9mm Sales Leaders (ex-China) have
failed in the business opportunity¹
The Company provides detailed Sales Leader statistics between2004 and 2012;
Using this data, we estimate that in the 2006-2012 period ~1.1mmSale Leaders failed² and left the business, a ~90% failure rate³
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(1) Uses the Company’s data to determine how many Sales Leaders “failed” between 2006 and 2012 (using churn as a proxy for failure). Using 1980-2012 Retail Sales as a proxy, we extrapolated our 2006-2012 churnedSales Leaders to approximate the number of Sales Leaders who have failed since 1980.
(2) Total Sales Leaders Demoted and Resigned in Jan. and Feb. between 2006 and 2012 was 1.07mm per HLF 10Ks filed during the period. In addition, by comparing full year Sales Leader additions with the beginning andending Sales Leader totals, we estimate that an additional 42k distributors left between March and December in the 2006 –2012 period (2012 was estimated using prior year trends).
(3) Failure rate = (Total Failed Sales Leaders Feb. 2006–Feb. 2012)/(New Sales Leaders Mar. 2004 –Feb. 2011).320
How Much Money do Failed Distributors Lose?
Distributors incur substantial non-refundable, non-product expenses intheir attempt to succeed
Leon Waisbein–Future President’s Team Retreat Presentation: Malta 2010
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Distributors Face a Long List of Expenses
The itemized list of Business Support Materials below comes from the blogof a former (non- Sales Leader) Herbalife distributor showing nearly $2,000of expenses in only three months, excluding Herbalife product purchases.
The company seldom acknowledges these costs exist
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http://www.trishparr.com/what-online-business-systems-and-herbalife-don%E2%80%99t-tell-you/
Closer Look atSales Leads
________________________________________________
- $991.26 Product purchases
$1,723 Total non-product expenses
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Sales Leads
Senior distributors have profitable side businesses by selling leadsat high prices to low-level distributors eager to grow their downlines
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Source: Online Business Systems (Herbalife affiliate) distributor presentation.
Nutrition Clubs Are Expensive to Operate
Nutrition Clubs, an increasingly important channel for Herbalife,are expensive to open
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John DeSimone, Herbal i fe CFO:
“So it depends on the marketplace, but the clubs can vary
from $5,000 to $6,000 to open to something greater than
that”
11/16/11, Morgan Stanley Global Consumer Conference
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“Newest Way to Wealth”–Jacobs v Herbalife International Inc.
In 2002, distributor plaintiffs filed a class action against Herbalife
challenging the marketing practices of Herbalife and several high-
ranking distributors
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Distributors were pitched the costly “Newest Way to Wealth”
program as a way to build their Herbalife business
Claims filed in connection with settling the case totaled $27mm and
averaged $10k per claimant; the highest claim was $128k
Herbalife settled the case for $6mm
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Source: Jacobs v. Herbalife International, Inc., Case No. CV-02-1431 (U.S.D.J., C.D. Cal.) 325
We estimate that the average failed Sales Leader has $2,000 ofexpenses, net of minimal retail and/or recruiting profit
How Much Money do Failed Distributors Lose?
Summary Cost Analysis
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Waisbein Presentation
Itemized BusinessSupport Materials
“Newest Way to Wealth”
Cost to Open aNutrition Club
1,275+
1,700 –Non-Sales Leader
5,000 - 6,000
10,000 = Average
The typical failed Sales Leader makes nearly no retail profit after productexpenses, surcharges, and price discounts. According to HLF’s own incomedisclosure, the median recruiting revenue for Sales Leaders is zero¹
Revenue Assumption
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(1) Herbalife Statement of Gross Compensation 2011. Our analysis includes active and inactive Sales Leaders
Have Much Have Failed Sales Leaders Lost?
= People Harmed
X
1.9mm
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= Net Losses per Person
Total Net Losses Since 1980
2k
3.8bn
This estimate does not include harm done to the ~10mm¹ former Non-
Sales Leader distributors. As such, we think the true financial damageHerbalife has inflicted is materially higher than $3.8bn
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(1) Assumes: 1.9mm failed Sales Leaders 1980-2012 at an 89% Sales Leader failure rate implies 2.2mm Total Sales Leaders. 17% of Distributors become Sales Leaders (previous slide), implies12.7mm totalDistributors 1980-2012. Implies ~10mm Non-Sales Leader Distributors 1980-2012.
To quantify the harm numerically isinherently conservative. No analysis
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328
can properly demonstrate the loss oftime, damaged relationships, and
emotional harm that is perpetrated byHerbalife on those who have beendeceived
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Management Credibility
Michael Johnson in His Own Words
http://www pscmhlflibrary com/herbalife-cnbc-clips/
Video Clip:
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http://www.pscmhlflibrary.com/herbalife cnbc clips/
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Michael Johnson on CNBC, 12/19/12
http://www pscmhlflibrary com/herbalife-ceo-on-cnbc-121912/
Video Clip:
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http://www.pscmhlflibrary.com/herbalife ceo on cnbc 121912/
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Actions Speak Louder Than Words
Since 2007, Michael Johnson has sold ~$140mm of HLF stock. These sales werediscretionary. His shortest dated options were not set to expire until 2013
$35,000,000
$ 0 00
$80.00Michael Johnson Stock Sales and HLF Share Price (Quarterly)
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Source:¹GMI 2012 Preliminary Pay SurveyMichael Johnson Form 4 Filings. Excludes dispositions for tax withholding and includes charity dispositions
$0
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
Q1'07
Q2'07
Q3'07
Q4'07
Q1'08
Q2'08
Q3'08
Q4'08
Q1'09
Q2'09
Q3'09
Q4'09
Q1'10
Q2'10
Q3'10
Q4'10
Q1'11
Q2'11
Q3'11
Q4'11
Q1'12
Q2'12
Q3'12
$-
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
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Johnson was paid $89.4mm in 2011, making him the highest earning Russell 3000 CEO that year¹
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Conclusion
Conclusion
Herbalife is a Pyramid Scheme
It has caused and continues to cause enormousharm to the most vulnerable communities in the
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U.S. and around the world
Our goal with this presentation is to shine