Herbalife Ltd. (NYSE:HLF) disclosed today that it had overstated new customer growth last year. The company has already been under investigation for allegedly practicing pyramid scheme. Two weeks ago, the nutrition firm indicated that it was talking to the Federal Trade Commission (FTC) on its marketing practices, which boosted the stock by nearly 10%. Now the company is blaming the overstatement on database errors, and that was enough to drag down the stock more than 15% in pre-market trading. It is now down about 8% for the day.
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Growth Lower Than Reported
In a filing with regulators on Thursday, Herbalife said that active new members witnessed 3.2% growth globally in the fourth quarter on a YOY basis. However, during the conference call on February 25, the company indicated a higher growth rate of 16.7%. Similarly, active new members growth was 30.7% in the United States and not 71% as disclosed during the call.
The regulatory filing said that there were over two dozen instances in which the company misstated new member statistics. The nutrition firm indicated that it depends on independent distributors to market its weight-loss shakes and supplements. Herbalife indicated that it was able to identify the errors on March 1.
Boon To William Ackman
The company indicated that it started to track these metrics in 2015 following the allegations surrounding its marketing strategy. The company indicated that it could not spot the errors earlier since there was restricted visibility in the rate of change in the metric. The admission of the errors should enable it to attract a lower penalty from the FTC than if the regulator had found it independently.
The latest news is a boon to Pershing Square Capital Management founder William Ackman, who has been accusing Herbalife of being a pyramid scheme. The hedge fund manager has been waging a lone battle with the company since December 2012. He also indicated publicly that he was going short on the company’s stock and made three hour representations on the company and its problems in the past. In fact, the nutrition firm had to spend $18.7 million last year alone to respond to the allegations.
