Herbalife (HLF) Stock: Skyrocketing On FTC Settlement

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Herbalife Ltd. (NYSE: HLF)

Herbalife is a company that has been under fire as of late. Activist Investor Bill Ackman has released 18 videos warning people that this is a pyramid scheme. However, Ackman wasn’t the only person looking into their actions. In fact, the United States FTC has been looking into the company as well. Today, the conclusion of the FTC’s investigation was a settlement, as well as restructuring plans. As a result, HLF climbed in value. Today, we’ll talk about the news from the FTC, how the market reacted to the news, and what we can expect to see from the stock moving forward. So, lets get right to it…

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HLF Settles With The FTC

As mentioned above, Herbalife is having a strong day in the market after it was announced that the company has entered a settlement with the FTC. Through their investigation, the FTC found some big concerns. First and foremost, the agency pointed out a big issue with regard to full-time and part-time income promises made by the company.

According to the statement that was released regarding the settlement, HLF promised part-time income of $500 to $1,500 per month in marketing materials. This was coupled with substantial full-time income, as well as images of distributors enjoying luxury cars, exotic vacations, and very expensive homes. However, the FTC found that this is rarely the case. The truth is that only a small minority of distributors ever achieve this kind of success.

The FTC found that distributors who enjoy this level of success have done so mainly by recruiting a downline. The downline is made up of distributors who buy the product at wholesale. Essentially, the structure of the business has been primarily to get distributors to purchase the product wholesale, not selling retail. So essentially, HLF has operated as a pyramid scheme.

The Settlement

In their statement, the FTC said that Herbalife and its affiliates have agreed to provide $200 million in redress for consumers who were harmed by the practices challenged by the Commission’s complaint. However, that’s not where the settlement ended. In their statement, the FTC explained that HLF has agreed to restructure its business. The company will no longer be paying distributors based on wholesale purchases in their downlines. Instead, compensation will be calculated upon verifiable retail sales. In the statement, the FTC had the following to say about the restructuring:

With this settlement, Herbalife has agreed to restructure its business, transforming it from an organization that pays its distributors based on their own wholesale purchases and those of their downlines, to one where compensation is calculated based upon verifiable retail sales. Significantly, in order to pay compensation to distributors at current levels, the order requires Herbalife to verify, through receipts and other reliable methods, that its business is driven by retail sales and that at least 80% of its sales are made to legitimate end-users. Otherwise, it must reduce rewards to lower levels. Under the order, an independent compliance auditor will review and assess Herbalife’s compliance with these structural provisions for a period of seven years. Herbalife is also barred from misleading distributors about their earnings potential and must pay $200 million in consumer redress.”

How The Market Reacted To The News

As investors, one of the first things that we learn is that the news moves the market. Any time positive news is released with regard to a publicly-traded company, we can expect to see gains in the value of the stock associated with the company. In this particular case, investors seem to be taking the news of the HLF settlement as positive. This can be seen in the reaction we’re seeing in the market today. Currently (12:23), the stock is trading at $66.20 per share after a gain of $6.86 per share, or 11.56%, thus far today.

What We Can Expect To See Moving Forward

Moving forward, I have a relatively mixed opinion of what we can expect to see from HLF. First and foremost, I am with the bulls in cheering the fact that the FTC investigation has come to an end and an agreeable settlement has been made.

However, because of this settlement, I do have some concerns with the future of Herbalife. At the end of the day, the company’s numbers were obviously padded by sales that really didn’t exist. Well, at least they won’t exist in the future. If compensation is only based on retail, we won’t see exorbitant wholesale sales made by distributors for the sheer purpose of increasing earning capability. At the end of the day, this could weigh heavily on revenue at HLF. So in the long run, the outlook following restructuring is relatively uncertain, adding risk to any move we would make right now. With that said, if you plan on buying the stock on this news, it’s best to move with caution.

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What Do You Think?

Where do you think HLF is headed moving forward? Join the discussion at TalkTRENDZ from CNA Finance!

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