Herbalife (HLF) is a global nutrition, weight-loss, and skin-care company.  It was founded in 1980 by Mark Hughes, who first sold the original weight-loss formula out of the trunk of his car in Los Angeles, California. In 1981, the company launched its skin and hair care product lines. Herbalife went public in 1986, originally trading on the NASDAQ. It was then taken private in 2002, but went public again in 2004, this time on the New York Stock Exchange, where it still trades today.

Since then, the brand has penetrated nearly every country around the globe and has become known as one of the leading providers of nutritional supplements, personal care, and weight management products. The company offers science-based products in four primary categories: weight management, targeted nutrition, sports and fitness, and outer nutrition. Total sales of $2.3 billion in 2009 put the company at the top of its industry, outshining competitors, such as Weight Watchers (WTW), NutriSystem (NTRI), and Medifast (MED).

Herbalife sells its products through a network of approximately two million distributors in 74 countries. The company utilizes the multi-level marketing compensation structure, providing incentive for distributors to search for and cultivate new talent, who, in turn, share any profits.  While in some countries products are sold through retail channels, the bulk of the product line is sold directly to customers through independent distributors via word-of-mouth advertising and strategic public relations, similar to companies such as Avon (AVP) and Tupperware (TUP). Indeed, the company likes to sponsor sports clubs, and favors celebrity endorsements in order to expand brand presence.  In 2010, it became a sponsor of soccer teams in India and Russia, two countries it hopes to successfully penetrate within the next few years.  The company also invests heavily in marketing campaigns promulgated by the distributors, such as its popular slogan “Lose Weight Now, Ask Me How,” which is printed on flyers, badges and posters that are disseminated to new and existing customers.

Penetration of new markets and worldwide brand expansion are key drivers in the company’s growth strategy.  The company is also aggressively promoting its “daily consumption” business model, hoping to acculturate its products in both new and existing markets.  The goal is to have customers use Herbalife products daily in order to achieve their health, nutrition, and weight management goals, re-ordering from the distributors as supplies run low.  This strategy seems to be paying off, as sales were on an upswing throughout 2010, and are expected to remain on an upward trajectory this year.

Herbalife has a history of healthy free cash flows. The company has been utilizing cash to both pay down debt and increase dividends.  In fact, in the latter half of 2010, it boosted its dividend payout by 25%.  Too, the company repurchased over $2 million shares of stock last year, with the goal of providing a boost to share net.  Leverage is expected to continue declining this year, which, coupled with the company’s sizeable cash position and swelling sales figures, augur well for the company’s financial future.  

Herbalife stock has been skyrocketing as of late.  Prices soared to an all-time high of $71.29 in early December 2010, and share net estimates are being raised continuously, both by management and industry analysts.  The company is positioned to post strong earnings over the 3- to 5-year pull. However, the share price strength discounts much of the price appreciation potential over the long-haul. Despite this fact, we believe these shares would be a solid investment for investors with a one year horizon. 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.