By Duane D. Stanford - 2012-06-11T17:46:47Z

Herbalife Ltd. (HLF) has an image problem on Wall Street.

Ever since Greenlight Capital Inc.s David Einhorn dialed into a May 1 earnings conference call asking for more disclosure, investors have shunned shares of the nutritional and weight-loss supplement maker. The influential hedge-fund managers query hit right at Herbalifes marketing Achilles heel: how to keep track of inventory when much of it is sold from thousands of distributors homes and car trunks. Einhorn had dredged up skepticism that has long plagued direct sellers from Avon Products Inc. (AVP) to Tupperware Brands Corp.

Herbalife executives say they thought theyd put such concerns behind them, especially since their products increasingly are sold in so-called nutrition clubs -- shopfronts where customers can drop by to sample products and exchange weight-loss tips. These operate more like traditional retail stores, which are easier for investors to understand.

There is enough insecurity in the direct-selling model that the stock reacted significantly with the questions Einhorn raised, Chief Financial Officer John DeSimone said in a telephone interview. Its an indication we need to do a better job of educating Wall Street as to how the model works.

On the call, Einhorn asked why Herbalife stopped giving a breakdown of three groups of distributors it had previously provided. He also asked for an explanation of financial incentives given to supervisors who sign up new distributors. DeSimone, who told Einhorn he stopped providing the data because it didnt seem valuable to investors, agreed on the call to resume the disclosures.

Investors werent assuaged. Herbalife plummeted 20 percent the day of the call, on the way to its largest three-day decline since the shares began trading in December 2004. Before Einhorns query, Herbalifes share price had hit an all-time high on April 23, spurred on by a 26 percent sales surge in 2011. The shares, down 36 percent from April 30 through June 8, rose 0.1 percent to $45.10 at 1:41 p.m. in New York.

Einhorn declined to comment.

Herbalife executives will try to reassure investors by demonstrating the benefits of nutrition clubs, DeSimone said.

That should help because you can go into these nutrition clubs and see the sales channel and measure it, said Scott Van Winkle, a Boston-based analyst with Canaccord Genuity Inc.

Continued here:
Einhorn Damage Control at Herbalife With Nutrition Clubs: Retail