With the FTC investigating Herbalife (NYSE:HLF), the worst-case scenario is now on the table: It's possible that the FTC could, at any moment, shut down the company and charge its executives with operating an illegal scheme. As one of the largest publicly traded multilevel-marketing firms, the shuttering of Herbalife would send immense shock waves through the entire industry.
Even if Herbalife emerges from its FTC probe relatively unscathed, revisions to the rules governing multilevel-marketing firms, or enhanced regulatory scrutiny, could weigh on other multilevel marketers in addition to Herbalife itself. Investors in Nu Skin (NYSE:NUS), Usana (NYSE:USNA), Primerica (NYSE:PRI), and even Avon (NYSE:AVP) should be prepared.
Nu Skin and Usana have long traded in tandem with Herbalife
Shares of Nu Skin and Usana have been following Herbalife quite closely over the last year-and-a-half: All three firms bottomed around the time of hedge fund manager Bill Ackman's initial presentation in December 2012, before surging higher over the course of 2013.
Like Herbalife, Usana, and Nu Skin are multilevel marketers with unlimited recruitment downlines and largely commodity products. While Ackman has slammed Herbalife's Formula 1 shake as being an overpriced generic powder, similar criticism largely applies to the products offered by Nu Skin and Usana -- vitamins, anti-aging lotions, and other products offering solutions that are, at best, unverifiable.
Other short-sellers have targeted these companies in the past: Citron Research took Nu Skin to task last year, pointing out extensive issues with the company's business in China. Barry Minkow went after Usana in 2007.
If the FTC were to slam Herbalife, Nu Skin and Usana would emerge as obvious targets.
Primerica, the Herbalife of finance
Primerica isn't as linked to Herbalife as Usana and Nu Skin are, but like those firms, it's a multilevel marketer. Rather than selling personal products, however, Primerica is ostensibly a financial services company.
Primerica has yet to be the target of a well-publicized short campaign, but it has come under heavy criticism in the past, with some calling the company a pyramid scheme (via Business Insider). Last year, Bloomberg shredded the company's business model, noting that while all must pay a $99 fee to try, few ever make it as a Primerica salesperson -- the vast majority fail.
The myth of the Avon lady?
Avon has long been seen as the model multilevel-marketing firm: In an industry potentially fraught with fraud, Avon stands out as a definitive exception. Or does it?
While Avon has some some major safeguards in place, including a three-tier-limited downline, criticism of the company has intensified in recent years, with some alleging that Avon has strayed from its roots. Pink Truth argues that Avon has "shifted" from its retail focus in recent years, and now centers its business on recruiting. Likewise, PyramidSchemeAlert argues that multilevel marketing has "corrupted" Avon, and that the notion of the "Avon Lady" has become a myth.
Last week, on a conference call in which he alleged Herbalife was violating Chinese law, Ackman was asked about his interest in pursuing similar investments. "This has been a fairly overwhelming project," he said, remarking that he "didn't know" if he'd ever do something similar.
But even if Ackman never targets another multilevel marketer, the successful takedown of Herbalife would open the door to other short-sellers. Usana and Nu Skin are easy corollaries, but even Primerica and Avon could be hit hard by me-too investors: Simply doing the groundwork for the FTC could successfully generate alpha. And even if these companies never face short-seller or regulatory scrutiny, they may have to make drastic changes to their business models, weighing on their earnings potential.
Although Ackman has remained focused on Herbalife, his battle with the multilevel marketer seems much bigger, and could ultimately reshape the entire industry.