Herbalife “inflated” its profits over the past 12 months by as much as 22 percent by using outdated exchange rates on sales to Venezuela, a new report claims.
The maker of nutritional shakes priced product shipped to its Venezuelan distributors at a 25-to-1 bolivar exchange rate but used an outdated official exchange rate of 6.3-to-1 to record the sales, thus overstating its profits, the report — commissioned by Herbalife nemesis and Pershing Square Capital CEO Bill Ackman — alleges.
While the practice is not illegal, investors believe Herbalife will soon be forced to change the way it books its Venezuelan sales to the latest official rate of 50-to-1.
Herbalife isn’t saying when or if it will change the rate at which it books its Venezuelan sales.
The Los Angeles company will report third-quarter results on Nov. 3.
“The hyper revenue growth and reported ‘profits’ that Herbalife has generated in Venezuela are a total fiction,” said Ackman, who has bet $2 billion that the company is a pyramid scheme.
Other companies doing business in the South American country — from giants like Coca-Cola and Colgate Palmolive to smaller multilevel marketers like Nu Skin, Tupperware and Avon — have already written down profits from Venezuela because of its hyperinflation.
On Wednesday, Tupperware said moving from a 6.3-to-1 bolivar exchange rate in the first quarter to 10.8-to-1 in the second quarter to 50-to-1 in the third quarter trimmed 21 cents a share, or 4 percent, off profits.
While Herbalife only books 5 percent of its sales into Venezuela, using the outdated exchange rate gives business in the South American country an outsized effect, the report claims.
Herbalife doesn’t break down Venezuela’s contribution to earnings, but the report estimates the nation accounted for about 14 percent of adjusted operating income during the 12 months ended June 30.
Herbalife has strongly denied Ackman’s claim that it is a pyramid scheme. The company declined to comment on the assertions in the Ackman report — saying it “uses the exchange rate that is appropriate, and the third quarter will be no different.”
Here’s how Herbalife took advantage of Venezuela’s runaway inflation and fixed currency regime, according to the report, written by Pershing Square Herbalife researcher Christine Richard.
A $21.75 canister of weight-loss shake powder shipped to a Venezuelan distributor was priced last December at a 25-to-1 exchange rate, or 537.39 bolivares, according to the report.
But when Herbalife booked Venezuelan sales last December, it used the outdated 6.3-to-1 official rate, the report alleges.
That would put revenue from the sale of the $21.75 canister at $85.30 — or nearly four times its US equivalent. Profit on those sales would be equally outsized, according to the report.
Herbalife’s Venezuelan business took off because the canister’s cost to local distributors — based on the black market exchange rate of 60-to-1 — was actually $8.96, according to the report.
At that price, many of the local distributors set up shop outside the country, where they pocketed huge earnings selling their lower-cost product, the report claims.
And because the distributors were based outside of Venezuela, they were able to get paid commissions in dollars, according to the report, further inflating their profits.