LOS ANGELESJust days after a Massachusetts senator called for more information about the business practices of Herbalife Ltd., the company is said to be facing a probe in Canada.
According to a Jan. 28 article in the New York Post, the Canadian Competition Bureau has launched a formal investigation into pyramid scheme complaints made against the marketer of nutritional and weight-loss products.
"Sources familiar with the inquiry" told the newspaper that the Competition Bureau has interviewed Herbalife insiders and distributors.
Herbalife is unaware of an investigation and has not been contacted, company spokesperson Julian Cacchioli said. The Competition Bureau said it could not confirm or deny whether there is an investigation, citing confidentiality of its probes.
Sources told the Toronto-based National Post that the agency is far off from launching a formal investigation.
Herbalife does little business in Canada. Canadian sales comprise just less than 1% of its total sales, Cacchioli said.
Still, the Post's report highlights allegations that Herbalife long has sought to dispel: that it fast-growing business exploits distributors under a model that rewards recruiting far more than actual retail sales.
Some members in Congress have asked government agencies to investigate Herbalife.
In letters sent last week to the Securities and Exchange Commission, Federal Trade Commission and Herbalife, Sen. Edward Markey asked for more information about Herbalife's business. In a Jan. 23 press release, the Massachusetts Democrat revealed that one family in his home state reporting losing $130,000 investing in Herbalife, including its entire 401K.
"There is nothing nutritional about pyramid schemes that promise financial benefit but result in economic ruin for vulnerable families," Markey said in a statement. "Herbalife may be a purveyor of health and wellness products, but some of its distributors are suffering serious economic ill-health as a result of their involvement in the company."
Herbalife has maintained that its business model is legitimate and has said that it clearly reveals to new distributors that most partners earn little or no money.
Timothy Ramey, a D.A. Davidson & Co. stock analyst who has covered Herbalife, has consistently defended the company's business model and dismissed allegations from the wealthy hedge fund manager William Ackman that Herbalife operates a pyramid scheme that is bound to collapse.
Herbalife no longer has Ramey's backing. Bloomberg News reported Jan. 27 that the financial analyst left D.A. Davidson to join Post Holdings Inc. as director of strategic ventures on a consulting basis. According to data compiled by the news agency, Ramey had the highest of seven analysts' target prices for Herbalife with a forecast that the company's shares may rise to $115 in the next year. A spokesperson for D.A. Davidson declined to comment on whether it would include future coverage of Herbalife.
Other analysts remain bullish on Herbalife. On Jan. 21, Barclays Research raised its EPS (earnings per share) for FY2014 to $6.27 from $5.65, citing "faster revenue growth" than a previous forecast in China, EMEA (Europe, Middle East and Africa), Latin America and Mexico. Barclays has a price target of $94 on Herbalife's shares, up from $78.
Still, concerns over Herbalife's business model may have extended all the way to China where Herbalife's competitor Nu Skin Enterprises is said to be facing allegations of operating a pyramid scheme. But even under a worst-case scenario in which the Chinese government investigated Herbalife and shut down its operations, the move would only affect $0.30 to $0.40 in annual EPS, Michael Swartz, an analyst with SunTrust Robinson Humphrey, said in a research note Jan. 16.
"We view HLF's [Herbalife's] risk as limited, believing this is a competitor-specific issue," wrote Swartz, who has a buy rating on the company.