Thoughts On The Herbalife Results

Herbalife (HLF) reported after market Wednesday. There was a lot of noise.

Margins in various markets fell. There is the usual Herbalife currency noise. But let's cut through all of that.

I don't particularly care in this case whether you believe that Herbalife is a scheme that rips people off on their sales or whether you believe (as I do) that Herbalife is a network whereby weight loss products are sold via community support.

At the end of the day profits will eventually follow the volumes of product they sell.

If they are crooked profits will follow volumes. If Herbalife is (as I argue) a true social support network profits will still eventually follow volumes.

Herbalife has for as long as I know used a consistent measure of volume - the volume point. This is not an arbitrary measure of volume. It is the mechanism by which distributors are paid and by which real cash moves. 

With a single exception this quarter and only in a trial way in Brazil and Mexico a volume point has an unchanged meaning for the last decade.For example a small tin of Formula 1, their main product and the largest selling diet shake in the world, is 23.95 volume points. It has been 23.95 volume points unchanged for decades.

The price of the product changes, but the number of volume points does not change. Changes in volume points are real changes. When volume points fell as the company implemented the changes demanded by the Federal Trade Commission those were real falls in volume.

And when volumes rose this quarter they were also real changes in volume. If they increase price revenue will grow even faster. 

Here is the volume points by sector this quarter versus the previous corresponding quarter.

 

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Disclosure: The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog ...

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