Ackman At the Herbalife Gate, Again

Take-away: We’re buying the dip in HLF as we think that the news about Chinese officials investigating Nu Skin is a separate issue from HLF, despite both businesses sharing risk on pyramid scheme claims. 


What’s going on with NUS and HLF?

  • Chinese regulators yesterday said they’d investigate accusations from The People’s Daily, the Communist Party’s main propaganda organ, which called Nu Skin, a skin-care and nutritional products company, a pyramid scheme.
  • Nu Skin (NUS) is trading down -45% since 1/14 (looks like someone had some inside info ahead of the announcement).  NUS earns ~ 31% of its revenues from mainland China.
  • Herbalife (HLF) is getting hit on pass-through fears that it could be the next target of an investigation (either abroad and/or in the U.S.). HLF has ~ 11% net sales from China, according to Q3 2013 results.
  • As background, the debate around the business practices of HLF took flight late in 2012 when Bill Ackman of Pershing Square Capital presented a 334 page PowerPoint at the Ira Sohn conference (on 12/20/2012) calling HLF a pyramid scheme, and announcing that his fund would take a short position in HLF with a $0 price target.
  • Rival activists, including Carl Icahn and Dan Loeb (and others), were quick to take the other side of Ackman’s short bet. 
  • Since Ackman’s presentation the stock has soared as high as 212%. As of December 2013, Ackman has lost as much as $500M in the position.
  • If you’re unaware of the intense animosity and scorn that these rival activists have for Ackman, see Vanity Fair’s April 2013 article The Big Short War.


Today we added HLF as a buy in our Real-Time Alerts

  • Today, it was announced that Ackman plans to claim in a public presentation next month that HLF operates illegally in China.
  • Yesterday’s Nu Skin news along with Ackman’s announcement today have sent HLF down -12% in the past two days.
  • We view Ackman’s decision to claim HLF operates illegally in China as an effort to talk up his book.
  • We think this position is supported by a number of factors:
    • As we’ve stated before in our research, we do not know whether HLF is or is not a pyramid scheme. A Federal agency (SEC, FDA, FTC, or IRS) would have to make this determination (not a money manager) and we’ve yet to see any interest in an agency to open Pandora’s Box on the questionable business practices and accounting of multi-level-marketing companies.
    • In his original presentation Ackman was unable to convince investors that HLF is a pyramid scheme (based on the stock’s move). He’s now trying to augment his claim, but now the target is China, a country steeped in opacity’s vine when it comes to transparency.  Remember, Ackman wasn’t able to equivocally show how the pyramid scheme worked in the U.S., with the aid of geographic proximity and the ability to communicate in his mother tongue.
    • We cannot underscore more how vehemently the rival activists want to bury Ackman on this position – even if they believe HLF is a pyramid scheme. We expect this rival camp to continue to drive the debate, and the stock.
    • The company has also done all it can to insulate itself and protect the stock price, from hiring the high profile David Boies of the law firm Boies, Schiller & Flexner LLP to issuing aggressive stock buybacks and dividend raises. 
    • Finally, HLF has a lot less skin in the game in China compared to NUS, as we note above.  While there’s the risk that a decision in one country can tumble weed into other regions, our investment approach with HLF is simply to take advantage of the stock that is oversold on fear.

Ackman At the Herbalife Gate, Again - zz. hlf


Matthew Hedrick


Takeaway: While our conviction over the next 3-6M is unlikely to be anywhere near where it has been, we think it pays to #BTDB in the Abenomics Trade.

This note was originally published January 13, 2014 at 16:19 in Macro




  1. We remain bearish on the Japanese yen and bullish on Japanese equities with respect to the intermediate-term TREND and long-term TAIL durations.
  2. With respect to the former duration, however, our conviction is dramatically lower than it was 12-15M ago.
  3. Specifically, we think Japanese economic growth is likely to slow throughout 1H14. To the extent that catalyst results in declining inflation expectations, we’d expect to see a [continued] correction in the USD/JPY cross and concomitant correction in the Japanese equity market.
  4. A immediate-term TRADE breakdown in the aforementioned currency cross (TRADE support = 102.68) will likely result in the exchange rate testing its intermediate-term TREND line of support at 100.06. An immediate-term TRADE breakdown in the Japanese equity market (TRADE support = 15,698) will likely result in the index testing its intermediate-term TREND line of support at 15,045.
  5. The aforementioned TRADE lines a good levels to buy protection to the extent you are looking to hedge for more noteworthy downside in your existing SHORT yen or LONG Japanese equity exposure(s). The aforementioned TREND lines would be a good place(s) to add to existing positions – to the extent you have pared them back or have plans to do so.
  6. Furthermore, there is a rising probability that both the USD/JPY cross and Japanese equities start to actually cheer on bad economic data; that would represent a material inflection from trends observed in years past, but very much akin to what we’ve all observed in the US over the course of 2010-12.



The consumption tax hike (scheduled for APR 1st) has likely been the most over-analyzed fiscal policy catalyst in the world over the past 6-12M, so we’re not going to waste your time adding to the slew of analysis. Japanese growth is a near-lock to slow in second quarter.


Where we are divergent from consensus is that we think Japanese economic growth slows in 1Q14E as well (i.e. sooner than the market might expect; Bloomberg consensus forecasts currently call for an acceleration to +3.1% YoY real GDP growth in 1Q14).




Considering that Japanese economic growth data has been white-hot in recent months/quarters, it’s not exactly going out on a limb to call for it to cool off, at the margins. Tough comps and #InflationAccelerating are threatening to suppress Japan’s consumer-aided recovery from currently elevated growth rates.










ALL EYES ON JAPAN - Consumer Confidence


ALL EYES ON JAPAN - Retail Sales


Moreover, despite marked improvement in domestic industrial production, manufacturing, capital goods orders, business sentiment, exports, etc., we believe that Japanese corporations have yet to fully buy into the sustainability of Abenomics – as evidenced by their forecasts for the USD/JPY cross and CapEx guidance that remains well off the peaks of previous economic cycles.


As such, the growth rates/index levels of the aforementioned indicators is at risk of slowing from currently-elevated levels until Japanese corporations get substantially more color on the much-anticipated “Third Arrow” of Abenomics (allegedly to be detailed in JUN).


ALL EYES ON JAPAN - Industrial Production


ALL EYES ON JAPAN - Manufacturing PMI


ALL EYES ON JAPAN - Capital Goods Orders


ALL EYES ON JAPAN - Economy Watcher s Survey




ALL EYES ON JAPAN - CapEx Guidance


ALL EYES ON JAPAN - Tankan JPY Forecast



To the extent a noteworthy slowing of Japanese economic growth results in declining inflation expectations, we’d expect to see a [continued] correction in the USD/JPY cross and concomitant correction in the Japanese equity market. It’s worth noting that the USD/JPY cross has a +0.85 correlation to Japan’s 5Y breakeven rate over the trailing 3Y.


ALL EYES ON JAPAN - Breakevens


ALL EYES ON JAPAN - JPY vs. Breakevens

Source: Bloomberg L.P.


That said, however, it’s hard to have a high-conviction view on that relationship at the current juncture. The next 6-9M is likely to present Japanese policymakers with their first real test on the economic growth front since Kuroda materially altered the way the BoJ conducts its monetary policy operations.


If Shirakawa were still in charge, we’d actually think about shorting the USD/JPY cross and shorting the Nikkei on a TRADE breakdown in the respective markets. Recall that Japanese capital and currency markets were constantly testing Shirakawa’s will to implement the necessary measures to overcome deflation – a task he ultimately failed miserably at.


Haruhiko Kuroda is a different animal altogether, however. It remains to be seen how much faith the market will have in his willingness to add to the BoJ’s “Quantitative and Qualitative Easing” program and how quickly they anticipate him doing so (80% of economists surveyed by Bloomberg expect additional stimulus measures by SEP). Faith, as evidenced by the net length in the futures and options market remains high – for now at least.




We too think Kuroda & Co. will continue to fight hard to achieve “+5% monetary math” and that expectation underpins our respective long-term TAIL biases on the yen and Japanese equities as outlined at the onset of this note. Moreover, the preponderance of recent commentary suggests they stand ready and willing to react to any confirmation of lost momentum on either the growth or inflation fronts in the interim.


ALL EYES ON JAPAN - 5  Monetary Math


Furthermore, there is a rising probability that both the USD/JPY cross and Japanese equities start to actually cheer on bad economic data; that would represent a material inflection from trends observed in years past, but very much akin to what we’ve all observed in the US over the course of 2010-12.


These views lead us to conclude that the current correction in the USD/JPY cross and the Japanese equity market are just that – corrections. As such, while our conviction over the next 3-6M is unlikely to be anywhere near where it has been in months and quarters past, we still think it pays to #BTDB in the dollar-yen and Japanese equities if and when the opportunity presents itself.


Feel free to ping me with follow-up questions if you’d like to dig in further on a specific topic(s).




Darius Dale

Associate: Macro Team


Takeaway: From Bull to Bear, we briefly run through our short thesis following our conference call.

We added CAKE to the Hedgeye Best Ideas list as a SHORT yesterday at $47.51 per share.


Click here to access the presentation: NEW BEST IDEA: SHORT CAKE




We have been bullish on CAKE for the better part of the past two years, but in this industry nothing lasts forever.  In full disclosure, CAKE is a strong company with a good management team, so we will be disciplined with this short call.


The bottom line is that 2014 is setting up to be a difficult year for the company.  To summarize our thesis, we believe the company’s three year run in improving margins is coming to an end.  Specifically, we believe the declines in food costs, labor costs, and other costs have run their course.


Traffic has declined for four straight quarters, a trend that management must address soon.  This suggests that 2014 could see an increase in labor and other costs as the company reinvests in store operations.  Factor in the minimum wage increases and the ACA, and it is clear that incremental pressure is beginning to build.




CAKE is scheduled to report 4Q13 EPS on 2/12.  Current consensus estimates suggest the company will report 2.0% same-store sales at the Cheesecake brand and 1.9% on a consolidated basis.  This would represent a slight slowdown in 2-year same-store sales trends of 30 bps.  We believe that those estimates are aggressive and have not been adjusted lower during the quarter despite sluggish industry sales trends.


On the 3Q13 earnings call, the company gave fairly aggressive guidance for 4Q13, due to the easy comparisons from a year ago.  The 0.9% comp from last year was the lowest of the 2012 and was impacted by the Presidential debate, Election Day, and Hurricane Sandy. 


Management commented on the 3Q13 call: “The housing market continues to recover, the stock market is up, there really doesn’t appear to be any negative calendar issues or holiday shifts that are impacting the fourth quarter.  I think that Thanksgiving and Christmas, there’s one less week between Thanksgiving and Christmas.  We don’t really think that’s going to impact us.”


However, one less week seemed to have an impact on a number of retailers this holiday season.  We are unsure why CAKE would be immune to these trends.


Consolidated revenues are expected to grow 4.1% in 4Q13 vs 3.5% in 3Q13, but we believe these numbers may also be aggressive given slower than anticipated 4Q13 trends.


Furthermore, the company is guiding to EPS of $0.57-$0.60 in 4Q13, based on a range of same-store sales between 1.5-2.5%.  The street is assuming the company delivers at the high end of the EPS range, currently registering at $0.59.  The current guidance for 2014 is for EPS of $2.29-$2.41, based on a range of same-store sales growth between 1-2%. 




In our opinion, the largest issues the company will face in 2014 is food inflation.  This becomes an even bigger issue considering management has limited pricing flexibility given the decline in traffic over the past four quarters.  Can they protect margins without perpetuating the recent decline in traffic?


Management is guiding to food cost inflation of 4-5% in 2014, driven primarily by shrimp and, to a lesser extent, salmon.  The company estimates this could impact 2014 by as much as $0.07-$0.10. 


As management stated on the 3Q13 earnings call: “We believe that we will be able to offset some of this pressure with slightly higher pricing, balancing our need to protect guest traffic and protecting our margins.  As a result, we factored in a net of about $0.04 to $0.07 into our 2014 earnings per share sensitivity.”


However, management failed to account for the spike in milk and cheese prices we are seeing early on in 2014.  In our opinion, this will add significant incremental pressure to the food cost line and will force management to lower their 2014 earnings guidance.  We run through this thesis in our presentation, including more thoughts on the topics, our earnings sensitivity analysis and the notion that management will be “in a box” in 2014.


If you haven’t already, we encourage you to read through the slide deck.  As always, we are available to talk.  Please feel free to call any questions. 













Howard Penney

Managing Director

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We’re hosting a quick conference call TODAY at 1pm EST to hit on the key points of our thesis and field questions. Please send any questions over to .


We added CAKE to our Best Ideas list as a high conviction SHORT yesterday.


After being the bull on CAKE for the majority of 2013, we have reversed course and turned bearish heading into the 4Q13 print and throughout 2014 for several reasons including, but not limited to:

  • The secular decline of the casual dining industry
  • The end of the road for CAKE’s margin story
  • Growing complacency on the street

Trading at a peak multiple, we see 20-30% downside to the stock in 2014 as full-year earnings estimates and expectations are revised down.


Click here for the full report: CAKE: BEST IDEA SHORT


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Howard Penney

Managing Director

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