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Jun 6, 2017

S3 Research: Herbalife Shorts Near Record Levels as Firm Cuts Sales Forecasts

Yesterday the Federal Trade Commission finally did what Bill Ackman’s powerpoint presentations could not – move Herbalife Ltd.’s (HLF US) stock price down 7%. Today’s trading saw a partial recovery in HLF’s stock price, with a rebound of 2% as investor’s fully digested management’s earnings revisions and the hiring of a temporary general counsel.

HLF’s $200 million settlement with the FTC stipulated that 80% of U.S. sales must be to outside customers and not to its internal sales force. HLF reported that 90% of its sales met that threshold this quarter, but at a cost that will lead to future revised financial guidance. The cost of teaching and implementing new processes and technologies will cost $0.12 in EPS this year and possibly more in 2018. HLF is now expecting EPS of $0.95 – $1.15 and sales to decline year on year.

HLF short interest is now $1.8 billion, up $635 million, or 55%, for the year and is getting closer to its historical high of $2 billion set in July 2013. After Bill Ackman of Pershing Square completed his $1 billion short position by the beginning of 2013, short interest continued to grow even as HLF’s stock price rose to the mid $60’s. Continued price appreciation squeezed some shorts out of their trades in 2014 and short interest traded in a range between $1.0 and $1.5 billion until the second half of 2016 when it peaked at just over $1.8 billion in July. In 2016, shorts bought back some of their positions as they took profits with the stock falling all the way down to $48.14 on December 30th. Despite HLF’s stock price rallying to over $70 in 2017, short sellers have remained firm in their conviction and are holding on to just over $1.8 billion in shorts.

In 2016 shorts were up $190 million, or +14.8%, in mark to market P/L, but they have not fared as well this year, down $573 million, or 37%, including today’s trading. Over the last two days shorts made $106 million in mark to market P/L, two-thirds of which belong to Bill Ackman’s short position while major shareholder Carl Icahn, with 22.9 million long shares, is down $96 million. Even with his recent loss, Carl Icahn is still up over $550 million in 2017.

The last two times HLF short interest jumped over $1.8 billion there were over $600 million of buy to covers in the next three months. This time, with HLF’s management revising forward looking revenue guidance lower, shorts may stay in their positions longer in order to see the impact of continued FTC compliance.

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Head of Research, S3 Partners
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