The Herbalife ($HLF) Dilemma: A Cross Cap Stack Trade Idea
The Herbalife ($HLF) Dilemma: A Cross Cap Stack Trade Idea
Reviewing Potential Trades in Herbalife's Levered Capital Structure
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Situation Overview:
Headquartered in Los Angeles, Herbalife Nutrition Ltd. (“Herbalife” or “HLF”), is the largest independent multi-level marketing (MLM) company in the global nutrition industry. The company develops, markets, and sells weight management, nutritional supplements, and personal care products through a network of ~5.7 million independent members across 95 countries.
Let’s be clear—Herbalife’s business model can, by many measures, be aptly described as a pyramid scheme. I won’t deny that. However, betting against it on this basis alone has cost many people fortunes (e.g., see Ackman’s money-losing pitch here). Pyramid scheme or not, this model has allowed the company to maintain a highly scalable, low-fixed-cost operation that has historically translated to robust FCF generation.
With that said, the company’s regulatory history and reputational issues have continued to negatively impact its operations. In 2020, Herbalife paid $123 million to settle criminal and civil charges related to corrupt practices in China. This settlement, coupled with ongoing allegations of operating as a pyramid scheme, has cast a long shadow over the company’s ability to attract institutional investors. These issues have come under even more scrutiny in light of shifting consumer preferences and heightened competition.
Challenging Refinancing Process
Against this backdrop, Herbalife recently completed a high-stakes $1.6 billion senior secured refinancing package in April 2024. This refinancing, which included $800 million of 12.25% senior secured notes due April 2029 and a $400 million senior secured Term Loan B facility, was crucial for addressing the company’s near-term debt maturities. However, the process highlighted the market’s growing skepticism about Herbalife’s business model and future prospects. The path to this refinancing was far from smooth—Herbalife initially struggled to sell its new debt offerings, with investors pushing back on pricing and terms. The company was forced to increase the yield on its bonds and widen the spread on its term loan to attract sufficient interest in an otherwise, red-hot leveraged finance market.
1Q’24 Performance
Despite Herbalife’s refinancing struggles, the company’s 1Q’24 earnings exceeded expectations. 1Q’24 sales (+2.4% y/y constant currency) met company guidance and consensus, but Adj. EBITDA (+7.2%) exceeded both, though this improvement was largely driven by cost-cutting measures. Constant-currency sales were strong across most geographies, except North America (-10.6% y/y), with improved new distributor trends in March and April suggesting building topline momentum. Despite ongoing profitability concerns, Herbalife expanded its cost-saving programs, announcing an additional $35 million in expected savings for 2025, with potential for further upside. The company proceeded to outline a clear path for 2025 EBITDA margin expansion, 2024 FCF generation, and the repayment of its 2025 bond maturities.
Market Skepticism Remains
CEO Michael O. Johnson, who returned to the helm in late 2022, is implementing a smorgasbord of strategic initiatives. These include a digital transformation centered around the Herbalife One platform, product innovation including a new vegan line, dynamic pricing strategies, and aggressive cost management. The company recently announced a major restructuring plan, slashing its workforce by 23% (441 employees) with the aim of generating annual cost savings of $40-50 million by fiscal 2025.
The market, however, remains skeptical. Herbalife’s stock has been volatile with significant drops following recent earnings releases. The company’s current market capitalization stands at just over $1 billion, a shadow of its former self. HLF’s bonds have also been under pressure, with the 4.875% senior unsecured notes due 2029 trading at around 69 cents on the dollar.
Going forward, Herbalife’s trajectory hinges on several critical factors including (1) managing its high-cost debt load, (2) sustaining distributor growth, (3) reviving mature markets, (4) capitalizing on emerging market opportunities, and (5) modernizing its business model to attract younger consumers. The company’s ability to navigate regulatory challenges, innovate it’s product lineup, and implement cost-saving measures without compromising growth will be crucial.
In the next section, I’ll take a deeper dive into HLF’s capital structure, financials, and assess whether the company’s secured and senior notes look interesting at current levels.
Disclosure: The information provided is for informational purposes only and should not be considered as investment advice. Any investment decisions made based on the information provided are at your own risk. It is essential to conduct your own research and consult a qualified financial advisor before making any investment decisions. Investing involves risks, and past performance is not indicative of future results. By using this information, you acknowledge that you are responsible for your own decisions and release me from any liability. Seek professional advice tailored to your financial situation and objectives.