June 28, 2022
Herbalife Nutrition is taking measures to combat inflation with price increases a senior executive recently described as “unusual” and “pretty significant.”
Speaking remotely during a June 20 conference hosted by Jefferies, an investment bank and financial services firm, Herbalife Chief Financial Officer Alex Amezquita said the global nutrition company planned to take pricing action in the coming days that amounts to around a 10% price increase around the world.
“That’s for most markets,” he said, adding the price hike may be delayed in some markets for “regulatory reasons.”
An Herbalife spokesman said the price hike affects all products.
Amezquita said the price increase won’t fully recover the elevated costs the company is facing. Herbalife must consider the impact of its decision on consumers of its products and also provide its distributors an opportunity to be successful, he indicated. Distributors can earn money by selling Herbalife products they buy at a discount.
Herbalife Chairman and CEO John Agwunobi previously noted “input cost inflation continues to be at historic levels, driving a significant rise in costs for ingredients, production and transportation of product,” according to a transcript of Herbalife’s May 3 conference call reporting its first-quarter results, provided by Seeking Alpha.
Amezquita described the 10% price increase as “pretty dramatic” and noted it comes on top of increases previously implemented this year in some markets. In the U.S., for example, a 6.8% increase was enacted in March, he said, which means the market had a 17% increase in a period of three months.
He suggested Mexico is subject to similar price increases.
“These are pretty dramatic price increases, and so we’re really going to have to just see how this plays out,” Amezquita said during the Jefferies Consumer Conference in Nantucket.
Success during pandemic
Herbalife Nutrition thrived during the height of the Covid-19 pandemic. From 2019 to the end of 2021, the company grew nearly 20%, Amezquita noted. Herbalife reported 2021 net sales of $5.8 billion, an increase of 4.7% over 2020 and the largest sales in its history.
Amezquita, whose company is largely reliant on a network of distributors who resell its products, described much of the demand during the pandemic as “situational.”
“A lot of the distributors and customers that came in were unique to pandemic conditions, meaning the captive seller or maybe not a lot of options with their time,” he said.
The company “as supplementary or part-time income was a very attractive choice because what else are you going to do,” he added. “Technology was being adapted by consumers and sellers in a way that made it very easy to do the business and find customers during the pandemic.”
But as much of the world emerges from Covid-19, distributors must adapt to business in a pre-pandemic model. That has coincided with a reduction in the activity of “sales leaders” in recent months, Amezquita said.
In the first quarter of 2022, Herbalife reported an 11% decrease in net sales ($1.3 billion). Sales were down in most parts of the world except for Mexico ($118.4 million, up 0.2%) and Asia Pacific ($407.7 million, up 1.1%).
Herbalife lowered its guidance to forecast a 2022 reduction of net sales between 4% and 10%.
“Despite the adaptability and ingenuity of our distributor base, we’ve begun to see an emerging shift in behavior,” Agwunobi shared during Herbalife’s conference call on its first-quarter results. “Specifically, we've begun to see that as a group, the behavior of distributors that joined the business during the pandemic has diverged from historic trends. The number of distributors from this cohort that are ordering and recruiting is below last year and below expectations.”
Herbalife can address the issue either by reengaging its distributors or recruiting and identifying new sales leaders to replace less active ones, according to Amezquita.
“We see a change in behavior of the cohorts,” he said. “We know what that problem is. It’s actually a known issue that we address in our 42-year history thousands of times as each market goes through a cycle.”
“We’re just looking for that data and we’re looking for the strategic initiatives that each market is employing to figure out, is it a better use of time to reengage or is a better use of time to recruit new?” Herbalife’s CFO asked.
In a June 23 research note following the conference, Jefferies equity analyst Stephanie Wissink wrote, “It will take time to digest lower distributor productivity by either back filling attrition or driving re-engagement.”
Distributor model and ‘preferred members’
In a chat with Herbalife executives during the conference, Wissink asked Amezquita why he believes Herbalife’s network of distributors “still presents the best option for your go-to-market model.” She pointed out some of Herbalife’s peers have discussed “making changes to their engagement models.”
Nu Skin Enterprises, for example, is pivoting to “social commerce.”
Amezquita emphasized the value of Herbalife’s current business model. “What is the value proposition of Herbalife Nutrition? There still is a fundamental lack of good nutrition globally,” he said.
Amezquita added later, “We feel like our direct selling channel is really well positioned. I really can’t think of a better model well positioned to try and affect change, sustainable change, in the nutrition category.”
In addition to its distributor network, Herbalife also has “preferred members” who don’t resell its products. Eric Monroe, Herbalife’s senior director of investor relations, said its “preferred members” represent about 10% of the company’s global sales. These are customers who join Herbalife to consume its products and have no plans to resell them.
In the U.S., where the preferred member program has been in existence for the longest period since 2018, about 25% to 30% of Herbalife’s business comprises these customers, Monroe shared during the Jefferies conference.
The program, which is called either a “preferred member” or “preferred customer” program depending on the market, is live in markets representing more than 80% of the company’s overall sales, according to Herbalife executives. Herbalife sells its products in six geographic regions: Asia Pacific (excluding China); China; EMEA (Europe, the Middle East and Africa); North America; Mexico; and South and Central America.
“Even if you are a preferred customer, there’s still a distributor that is making sure that your journey or that customer’s journey is unique,” Amezquita said. “There’s accountability.”
Herbalife’s recent challenges create some uncertainties for its investors, which is perhaps reflected in its stock price. Shares of Herbalife (NYSE: HLF) have lost nearly half their value since they started sliding in February, surpassing the overall decline in the stock markets, the Los Angeles Business Journal reported Monday.
On Feb. 23, Herbalife’s stock closed at $40.49, and to a large extent, its price has progressively declined since that time, according to New York Stock Exchange data. Shares of Herbalife closed Monday at $23.45.
Herbalife “has become a more layered story in recent quarters, with mixed inputs and a higher degree of variability than historical pattern,” Wissink said in the equity research note.
The analyst still described the company’s “cash flow dynamics” as “relatively attractive,” and she suggested Herbalife could benefit if the labor market softens. In a challenging job market, more people tend to seek part-time gigs, such as distributorships offered by Herbalife.
“Direct-selling models are momentum driven, and we need to see at least a bottoming of productivity and limited demand erosion from pricing,” Wissink wrote. “Should the macro further soften and gig economy labor pool expand, efforts to recruit new sellers would go further faster, which would provide a directional turn.”
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