Hedge-fund manager Bill Ackman has called Herbalife (NYSE: HLF) little more than a "pyramid scheme," but where does that leave it and other direct sellers or multi-level marketing (MLM) stocks like USANA Health Sciences (NYSE: USNA), Nu Skin Enterprises (NYSE: NUS), Mannatech (NASDAQ: MTEX) and Reliv International (NASDAQ: RELV) that were also feeling some heat this week? For starters, Ackerman is not the only critic of Herbalife’s business model plus a Belgium court has recently ruled its an illegal pyramid scheme. However, Herbalife’s CEO Michael Johnson has gone on CNBC to angrily say: "This is not about Herbalife's business model. This is about Bill Ackman's business model" (which of course, involves shorting the stock). Johnson claims a bunch of Puts are set to expire today – a day after Ackman was scheduled to make a presentation presenting his thesis about the company (click here to see that presentation). Herbalife is also down 34.8% since the start of the year but the stock is up 61.5% over the past five years.
What needs to be said though is that Herbalife distributors can earn additional commissions from sales by their “downline” distributors – which is similar to how pyramid schemes work. Some distributors have also apparently abused or have been accused of abusing this practice to augment their commission with Herbalife standing accused of not doing enough to curb such practices. With that in mind, here is a quick look at Herbalife’s direct selling competitors who could also face the same types of allegations:
- USANA Health Sciences (NYSE: USNA). A small cap developer and manufacturer of science-based nutritional and personal care products, USANA Health Sciences has operations in 15 markets worldwide, where it distributes and sells its products by way of direct selling. On Thursday, USANA Health Sciences fell 4.08% to $35.49 for a market cap of $511.97 million, but the stock is up 16.9% since the start of the year and down 18.3% since the beginning of 2011. A quick search for USANA Health Sciences and the words pyramid scheme reveals a blog entitled “USANA Watch Dog - MLM Pyramid Scheme Scam?” with the headline: “Researching and analyzing USANA and its pyramid scheme. Associates, Shareholders, and Federal Regulators should read.” According to the blog’s frequently asked questions, USANA Health Sciences forces distributors to make $100+ personal product purchases every 28 days (or 13 times a year) in order to qualify for commissions and to hold onto any accumulated Group Sales Points (GSV). Its this money that is primarily where “all the money comes from to fund the commissions and bonuses.” USANA Watch Dog further contends that USANA Health Sciences fixes the price of its products too high to ensure corporate profits while 45% of the product cost get paid out as commission to the distributor's upline. That benefits only Gold Directors and up (or less than 1% of USANA Health Sciences) while 99% of remaining distributors never see a profit due to “ZERO demand for the USANA products at their current high prices so nothing can ever get retailed to customers...”
- Nu Skin Enterprises (NYSE: NUS). A global direct selling company with operations in 52 markets worldwide, Nu Skin Enterprises develops and distributes anti-aging personal care products and nutritional supplements under its Nu Skin and Pharmanex brands through a direct selling model with independent distributors in all of its markets except Mainland China. On Thursday, Nu Skin Enterprises fell 3.83% to $39.95 for a market cap of $2.34 billion plus the stock is down 17.7% since the start of the year, but up 138.6% over the past five years. Back in the early 1990s, Nu Skin Enterprises was investigated by the states of Connecticut, Florida, Illinois, Michigan, Pennsylvania and Ohio over allegations of misleading marketing practices with the company ultimately settling with 5 of these states. Then last August, short seller Andrew Left's Citron Research accused Nu Skin Enterprises of operating an illegal multi-level marketing scheme in China – the fastest growing direct selling market. Nu Skin Enterprises responded by saying its sales model complied with Chinese regulations, but the allegation was enough to knock around 10% off the company’s share price.
- Mannatech (NASDAQ: MTEX). A small cap global wellness solution provider, Mannatech develops and sells nutritional supplements, topical and skin cares products and weight-management products through a network of independent associates and members. On Thursday, Mannatech fell 2.1% to $6.75 for a market cap of $17.87 million, but the stock has an average daily trading volume of around 7.5k shares. Mannatech is up 53.4% since the start of the year and down 88.7% over the past five years. In 2008, Mannatech settled a class-action lawsuit accusing it of failing to control its sales associates and allowing them to make false product claims by agreeing to pay $11.25 million. Then in 2009, Mannatech settled a civil complaint in Texas by agreeing to pay $4 million in restitution to clients who purchased products and $2 million to the state to cover court costs. The bad publicity from such cases appears to have hit Mannatech’s bottom line as it has reported net losses of $20,659k (2011), $10,616k (2010) and $17,368k (2009) for the past three years and will probably report another net loss for this year.
- Reliv International (NASDAQ: RELV). A developer, manufacturer and marketer of a line of nutritional supplements addressing basic nutrition, specific wellness needs, weight management and sports nutrition, Reliv International sells its products through an international network marketing system using independent distributors. On Thursday, Reliv International fell 0.78% to $1.40 for a market cap of $17.45 million on 12.4k shares traded verses a normal daily average of just under 10k shares. Reliv International is up 13.8% since the start of the year and down 82.6% over the past five years. A quick search on Google about Reliv International does not reveal any smoking guns in the form of court cases and the like on the first page. However, there is a website called Reliv WatchDog that invites anyone with a bad experience with Reliv International to post their complaints.
The Bottom Line. The problem with direct seller or multi-level marketing (MLM) stocks like Herbalife, USANA Health Sciences, Nu Skin Enterprises, Mannatech and Reliv International is not so much whether it’s a pyramid scheme orchestrated from the top down, but the fact that the direct selling or MLM means there are just too many chances of a few bad apples getting in and making all sorts of claims about the products they are selling to try and bump up their commissions. If the companies choose to look the other way or don’t weed out these people quickly enough, they then open themselves up to lawsuits and investigations. For that reason, conservative investors might want to look elsewhere for profits.