What is Retail Sales for MLM Companies?
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Imagine reading the 10K of a retailer like Sears, Walmart, or K-Mart and trying to make sense of the following language, from the most recent 10Q from Herbalife:
"A key non-financial measure we focus on is Volume Points on a Royalty Basis, or Volume Points, which is essentially our weighted unit measure of product sales volume.
It is a useful measure for us, as it excludes the impact of foreign currency fluctuations and ignores the differences generated by varying retail pricing across geographic markets.
In general, an increase in Volume Points in a particular geographic region or country indicates an increase in local currency net sales."
What is Herbalife trying to say here? I have no idea, but then I only have a PhD in decision theory and a law degree.
Now imagine that you read further in the 10Q and discovered that Sears, Walmart or K-Mart sold to their customers at $X, but called it a "wholesale" price, expecting that their customers would then re-sell what they just bought for $2X.
That would be odd.
Next, you found out that neither Sears, Walmart, or K-mart actually kept track of whether their customers could, would or actually did engage in re-selling, but insisted that they were selling at a discount to retail. Even though they had no idea who sold retail and for how much.
Again, that would be very odd.
This the picture of Herbalife, according to Robert Fitzpatrick's recent report for Minkow's FDI.
Robert writes:
"Herbalife announces at the very beginning of its 10K and repeats this statement throughout about selling its products "through" 1.7 million "distributors."
Does it?
In fact, almost not at all. The claim of having "independent distributors" is a ruse.
It is a cover-up of the reality of an endless chain recruiting scheme. The distributors do not distribute.
They just purchase, and some recruit. Herbalife does not sell "through" them, because there is no end-user base.
If one exists, it is not described in the 10K. Indeed, as noted earlier, Herbalife claims that more than 500,000 of the "distributors" are just "discount buyers". How many consumers are Herbalife retail buyers?
No one knows. Herbalife does not track its own end-user customer base!"
Robert claims that Wall Street analysts have not asked the correct question: how many retail customers are there for your product? How many distribute the product at the full retail mark-up? Are you only selling primarily to your distributors, engaging in the marketing fiction that you are selling to them at a wholesale price?
Advertising that a good is 50% off, when it is never sold at the 100% price may be grounds for a false advertising claim, in either Canada or the US.
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