Herbalife: A Tale of Two Forces

Seeking Alpha:

Investors in Herbalife Ltd may have reservations when looking at the current state of the US consumer. After all, the economy appears to be entering a recession, housing prices have taken out a significant source of funding, and employment numbers are beginning to look less attractive. So one might assume that with a declining environment that consumers would be less likely to spend discretionary income on dietary supplements.

However, there is another factor at work which is strongly benefiting this multi-level marketing corporation. As people become less comfortable with their standard of living – or face the prospect of losing full time employment, many are looking for creative opportunities to increase their personal income. Herbalife is capitalizing on this entrepreneurial shift and recruiting individuals to serve as a growing salesforce for the company’s products.

The multi-level marketing arrangement basically allows Herbalife to expand its salesforce with no up-front cost and all the benefit of this stronger selling team. Since sellers are recruited as individual representatives of the company and are paid only based on their production, there is no cost to Herbalife unless there is also associated revenue along with the expense. This variable expense format allows costs to stay under control regardless of business activity and creates much less risk for the overall corporation.

Looking at the most recent quarterly results, revenues beat expectations by a significant margin. The company reported revenue of $640 million and adjusted EPS of $1.03. Strength was attributed both to domestic sales (United States revenue was up 18%) as well as to international activity. Of particular note, China revenue was up 125% and this was the third consecutive quarter that China has grown at a triple digit rate. Another strong region was South America which saw sales of $94 million, good for a 47% increase. This was due both to strong recruitment of new representatives as well as favorable currency trends.

Logo from Herbalife.

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