Bill Ackman’s $1 billion short bet that Herbalife is a pyramid scheme may be losing steam — but the spotlight he shined on the company could be pressuring it to change its ways.
The distributor of nutritional supplements is expected to change how it classifies some of its distributors — to better identify them as end-consumers of the product, Herbalife executives said in a private meeting this week, sources said.
If the percentage of sales to these end users is high enough, the change could support a key point Herbalife has made in arguing against Ackman that the company is legitimate.
The reclassification won’t be a total surprise.
Des Walsh, president, told The Post last week after Herbalife’s investor presentation that the company was weighing whether it should “apply a different name or terminology” to a subset of distributors “who’ve never recruited anyone” — and have purchases below a certain monthly level.
These distributors, Welsh said, could still get the distributor discount on products. The change, he said, is still “several months away.”
“They can try to change the name, but the fact is these are not real customers,” Ackman told The Post last night.
“It would be in their best interest to put that question to bed,” DA Davidson analyst Tim Ramey said, speaking of the distributor-end user conundrum.
Ramey suggested the new classification might be “preferred customers.”
Other multi-level marketers, like Nu Skin, are distinguishing themselves from embattled Herbalife by telling investors that they have such preferred customers.
Although there are many ways to determine whether or not a company is a pyramid scheme, a court decision in 1979 about Amway’s practices established what’s called the 70/30 rule — a benchmark that 70 percent of a distributor’s product must be sold to consumers for the company to avoid being considered one.
Right now, there’s no way to know what percentage of Herbalife distributors’ product is sold to retail customers.
The company has maintained it doesn’t follow the so-called Amway rule. It also doesn’t track retail sales.
“Is this going to be marketable from a distributor’s point of view?” asked Douglas Brooks, a lawyer who has sued Herbalife over deceptive practices in the past.
“If you are trying to sell products by selling the business opportunity, if you’re calling them a preferred customer, is that going to affect your recruiting?” he added.
Brooks said a lower monthly purchase minimum — as Walsh suggested — might fudge the matter by letting some distributors in lower-income areas be counted as consumers.
For now, profits are soaring.
Herbalife yesterday said it will earn $1.02 to $1.05 per share in the fourth quarter compared with 86 cents in 2011. Analysts were expecting $1.01. Shares fell 3.4 percent to close at $43.52.
The decline was tied to disappointment over Herbalife not announcing its buyback offer would come as a Dutch Auction, analysts said.
A Dutch Auction buyback can create a short squeeze. The company can start buying back stock next Tuesday.