Motley Fool Hidden Gems Investing - All Roads Lead To Retail

Episode Date: August 18, 2017

It’s Retail-palooza! We dig into the latest results from Walmart, Target and Alibaba. Home Depot builds record profits, while Foot Locker and Dick’s Sporting Goods deliver minor league results. Plus, in the wake of the Chinese government cracking down on multi-level marketing firms we revisit our interview with Ted Braun, director of the Herbalife documentary "Betting On Zero." Learn more about your ad choices. Visit megaphone.fm/adchoices

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But you can give them to the birds and bees From Fool Global Headquarters, this is Motley Fool Money. It's the Motley Fool Money radio show. I'm Chris Hill, and joining me in studio this week from Million Dollar Portfolio, Jason Moser, and from Total Income, Ron Gross. Good to see you gentlemen, as always. Hey, hey.

It's not just earnings palooza, we've got retail palooza. We're also going to dip into the Fool mailbag, and as always, we'll give you an inside look at the stocks on our radar. are. But we start with the two biggest bricks-and-mortar retailers, Walmart and Target, both with second quarter reports, both putting up profits and revenue higher than expected. The stocks are basically flat this week, Ron, but this is better news than what we are seeing from some of the smaller general retailers. I think that's a good way to summarize it. I like both these reports. I think Walmart's was a bit stronger than Target, and Walmart

has been doing better than Target in general. Walmart's grocery business, not too shabby. Putting up some good numbers. Both companies beat expectations. Same-store sales were positive and continuing a nice trend. E-commerce was strong for both companies. Walmart a bit stronger, up 60%, versus Target's up 32%, but either way, you can't complain there. And both companies increased guidance. So, they're expecting these trends to continue into the future. And the stocks are not that expensive. I mean, Walmart at 18 times and Target at 12 times. If you wanted to take a flyer on retail, you could do worse than taking a flyer here, but I'm not recommending that necessarily. There's a lot of uphill battles to be fought still.

I'm glad you brought up grocery, because I think that's one thing that, I mean, Walmart particularly, I just don't think they get the credit. At least in the public eye, most people I speak with don't realize that, really, Walmart is the market share leader, domestically, at least when it comes to grocery. So, to me, I feel like, maybe we're at a point where I feel like we're at peak Amazon, right? I feel like every week, we're always talking about Amazon, Amazon, Amazon, and it's always, it all boils back to Amazon, and how are you going to be able to compete with Amazon. Let's not forget that Target and Walmart are good businesses with very big presences out there already. They have a lot of what you

need in the retail space, and that is retail space. It's just a matter of how you use it. They're getting with the program there and figuring out how to employ that big physical presence in a more efficient way in adopting e-commerce. Again, I think Amazon's purchase of Whole Foods, very indicative of the fact that they recognize grocery as such a big opportunity. And we know that because, obviously, Walmart does so well with it today. So, yeah, I'm not saying I'd get out there and buy Walmart or Target shares today, but I don't know that I'd be shorting them either. I mean, I think these are two still very relevant businesses that have a meaningful presence and should remain relevant for some time.

And competition not only from Amazon, but the German discounters that we sometimes talk about and pronouncing correctly, I'm sure, Aldi and Lidl, are some concern to Walmart, I think, in particular. And they've got their eye on them, because these discounters really, you know, they're coming in guns blazing for market share. So, don't count those guys out. I forget who we were talking about recently, but it was some retailer that was relatively late to the online sales game. And in their most recent quarter, their online sales were up only in the neighborhood of barely double-digits, something like 12%, that sort of thing. What we were talking about in that regard was, look, if you're new to the game, that's fine.

You need to be putting up much bigger comps right out of the gate in terms of online sales. To that point, as you mentioned, Ron, Walmart's online sales, I know that they're working off of a smaller base than others, but 60% plus, if they can do that for a couple more quarters, then it becomes really interesting. I don't know if they can continue to put up those kinds of numbers, because Jet.com, the inclusion of Jet.com, is a big part of this. So, I think that kind of starts to level off after a certain number of quarters. But still, if you need to buy this distribution channel rather than grow it organically, you need to be there, and you need to do it in a big way. And I think Walmart and Target are both doing a nice

job. Let's go back to Target for a second, just because Brian Cornell had such a great first year as CEO. And it seems like, at the point that Target decided they were going to sell their pharmacies to CVS Health, and yes, they got that infusion of cash. But at the time, Cornell talked about how this is going to enable us, we can focus better. He talked about clothing. And it just seems like they're not doing badly, but I really expected a little bit more out of Target once they got out of the pharmacy business. I think it really goes to how difficult of a challenge it is for these businesses. It has been much easier for Amazon to pivot from e-commerce to physical retail versus

physical retail going the other way. So, for Walmart and Target, a lot of it is boiling down to not just growing out their e-commerce operations, but also figuring out ways to make acquisitions to bring more retail and e-commerce presence into their family. Jet.com and Bonobos and all of that stuff, those are probably necessary moves. It doesn't necessarily mean they'll be successful. But yeah, I think it really targets challenges, just points to how monumental a task it is. And building on the acquisition theme that you just mentioned, and Target in particular, They just acquired a company called Grand Junction, which is going to allow them to

test same-day shipping in New York City, and next day in Denver and Dallas. So, keep an eye on that. But I agree with what you said, easier for Amazon to go backwards than maybe Target to move into Amazon's world. So, keep an eye. Shares of Alibaba rising this week. The Chinese e-commerce giant posted first-quarter profits of just north of $2 billion. We got a listener email from Reid Reimer, who writes, In previous episodes, there's always been a factor of, be careful, because these are Chinese stocks. But I'm curious how careful we need to be if, hypothetically, I own Amazon and MercadoLibre, should I also own some Alibaba to have the world covered? If I own Google,

should I also own Baidu? I'm just curious, as it seems like these Chinese companies are competing against companies I could own, and I wouldn't mind winning in the long-term. It's a great question. Yeah, I like that. It's like, having the world covered, right? That's like the Dr. Evil strategy. Just, nothing wrong with that. And I love that perspective. And I think with the thinking there in Amazon and Mercado Libre, yep, Alibaba will give you a lot of share on that side of the world as well. And I think that's a good way to look at it. I mean, typically when we talk about Chinese stocks, I mean, there are a lot of hurdles there that you have to deal with. I mean,

they are just, we're never going to get that level of transparency that we're able to get with companies here. Alibaba in particular, if you look at its corporate structure, if it were a Facebook status update, it's complicated. That's basically it. You can't make heads or tails of it, so you have to go into there knowing that you're just along for the ride. Now, with that said, Jack Ma, who is the chairman of the company, and obviously very driven, making a lot of smart decisions, looking really to turn China more into an importer, and that's kind of part of the purpose of Alibaba, is to really open that Chinese market up to the rest of the world as well. I think, if you're going to invest in pure plays in China, you

need to invest in the market leaders. Alibaba, Baidu are two very good examples of businesses where I think you can have that exposure. Tencent, Facebook of China's Tencent. Yeah, and I think you need to keep it limited. I would make them smaller positions than probably companies that we hold over here, but I definitely like that global strategy. Shares of Alibaba, by the way, up more than 90% so far in 2017. My guy, Holden Kushnery, he hung on to his shares. He's feeling pretty good about that now. Let's move on to fashion and apparel. Shares of Coach have been having a nice run this year

until the company's fourth quarter report came in with some disappointing guidance as well. And shares of The Gap remaining flat for the year despite strong results out of the Old Navy brand, Ron. Yeah, Old Navy continues to be the strength there. Old Navy has increased same-store sales in seven of the past 10 quarters. Strength coming from there. Banana Republic and Gap, not so much. But I think the reports for both these companies actually were fine. Stocks selling off notwithstanding. Gap definitely had some better-than-expected highlights in there, and I was pleased to see it. And they did raise their full-year guidance. So, not too shabby. Coach, again, you were right, the guidance, not so much. But the quarter

was really fine. It just wasn't good enough for what investors were expecting. You do have revenue up 6%, adjusted earnings up 13%. They recently acquired Kate Spade, which I think will be nice for them. But the guidance just wasn't there. Yeah, I think you're spot-on with Coach. I was looking through that release and the call. And I think it was a decent enough quarter, decent enough year. But looking forward, if you look through that release, it's a great example of needing to dig a little bit below the surface there. Because they called for top-line revenue growth of 30%. And you look back and you think, wow, 30% growth, that's terrific! But, let's remember, there's Kate

Spade, there's Stuart Weitzman. All of that is representing that growth. When you get down to the organic number there, they're calling for organic growth of low, single digits. Now, maybe they're being conservative, and if they are, I applaud that, but the burden of proof is on these guys to actually show that these acquisitions are going to result in longer-term organic growth to help these businesses really make that leap into that lifestyle brand and become such a strong global player. Again, to me, I think the burden of proof is on them. Maybe they pull it off. It's been a good year for them so far. But yeah, I don't know if this is a stock I really want to be hanging on to right now. I don't

think it's your ideal buy-to-hold company anymore. I think you have to really pay attention to valuation, and then you have to be ready to get out when the times are looking pretty good. I think that's fair. The specialty retail graveyard is littered with companies who have had success and then not, and then tried to turn, and maybe did it a little bit, and then didn't go far enough. These stocks in a vacuum aren't cheap. Coach it 17 times, Gap it only 11 times, but there's always a reason for that, and that's because of the uncertainty going forward. These are tough businesses with lots of competition. I wouldn't be diving

in right now. If I did dive in, I might do a basket of these types of stocks rather than making a specific bet on one, but I'm not there yet. Why do you think Gap isn't doing more to expand the Old Navy presence? Because it really does seem like, for a few years running, the brightest part of their business has been Old Navy. The lower-priced edge of that market is not without competition. You've got your T.J. Maxx's of the world who are knocking the cover off the ball. We see it with Old Navy, too. It's the strength of that company. But it is, without a doubt, a competitive segment of the marketplace.

I think if you're management, you see that you have a portfolio with brands like Gap and Banana Republic. I mean, you don't want to just turn yourself into a business that's so reliant on one lower price point brand. I mean, if you're good management, then you still look at that as a valuable portfolio of brands, and you think there's an opportunity there. Coming up, a few more retailers and a couple of stocks on our radar. Stay right here. You're listening to Motley Fool Money. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against,

so don't buy or sell stocks based solely on what you hear. Welcome back to Motley Fool Money. Chris Hill here in studio with Jason Moser and Ron Gross. Brutal week for sports retail. Footlocker shares fell 30% on Friday after terrible second quarter results and Dick's Sporting Goods down only, and I put that in air quotes, only 20% on a second quarter report that wasn't as bad as Foot Locker's, but Jason, that is probably damning with incredibly faint praise. No, it was just brutal on so many counts, because after Nike had reported results, and we've seen what Under Armour's doing, these companies are investing very heavily in direct

to consumer. What that does is, it really presents a serious problem for companies like Foot Locker and Dick's Sporting Goods that sell a lot of Nike and Under Armour stuff. The short-term and the near-term, it's very easy to see the challenges that Nike and Under Armour face because they're a part of that network. But longer-term, consumers buy product. That's what drives these sales, is product. Under Armour and Nike are the ones responsible for a lot of that good product and those brands hold a lot of value. So, I mean, you look at Foot Locker's call, he said on the call, and I quote, when we were on the call in May, we certainly didn't see the business dropping off as rapidly as it did, end quote. So, I

mean, it was not that ... Boy, you don't want to hear that! No, I mean, that's really not that long ago, right? And so, I mean, this business fell off of a cliff in short order, and really, it's not looking all that great going forward either. With Dick's Sporting Goods, on the call, they were talking about extensive consumer research saying that customers have told us they feel our prices are not competitive in today's environment. Well, the way you fix that is you cut prices, Chris. Anybody who's anybody knows that typically that's going to affect your profitability. When we look

at these retail players, kind of like restaurants, when traffic is great and business is booming, a really nice business to be in, because those stores can really witness a lot of operating leverage as you keep that traffic going through the stores. But it really switches to the other gear when traffic falls off a cliff, and we're starting to see with Dick's Sporting Goods, top-line challenges, operating margins are getting squeezed, and really, it doesn't look like anything on the horizon is going to be there to fix it. So, I don't know that I'd really want to be holding either one of these stocks for the next year at least. Agreed. Actually, Dick's was not as bad as Foot Locker. In fact, the quarter in

and of itself was actually not that bad at all. Both revenue and earnings were fine. The e-commerce sales for the quarter was up 19%. They had some good stuff going on here, but it's all about the future. With stocks, let's face it, it's always all about the future. And having to be promotional, having to lower prices, having to increase marketing in order to retain some semblance of market share is going to be a disaster to the bottom line. So, in hindsight, last year when Sports Authority declared bankruptcy … Hey, they were just getting ahead of the curve, man. I was just going to say, instead of looking at Foot Locker and Dixon thinking,

oh, what a great opportunity for them, it may have been a warning sign. I think it was a very good warning sign. Home Depot's second quarter profit was a record $2.7 billion, and it just was not enough to keep shares of Home Depot from falling 5% this week. Help me out, Ron. They also raised guidance for the second time this year. This is one where I would ignore the stock, focus on the company and the results. Really strong. Same-store sales up 6%, 6.6% in the U.S.

The big four things we look at all showed positive trends, and those are big-ticket sales, average ticket, number of customer transactions, and sales per square foot, all trending really nicely. They raised their guidance. So, as we say, firing on all cylinders for Home Depot. Maybe folks are saying, you know, this can't last forever. interest rates aren't going to be low forever, housing sentiment isn't going to be this strong forever. This will ebb and flow, and this type of company will trade in cycles. But if you're a long-term buy-and-hold investor who can just withstand those cycles, this

is one that you would be fine to have in your portfolio from now until pretty much forever. Yeah, I couldn't agree more. I think Home Depot is that anomaly in the retail space where you can look at it and say, you know what, that's a retail company I would buy and probably hold just indefinitely through thick and thin, because they have a reason to perform in virtually every market. And I think Lowe's, we're going to see Lowe's earnings next week, probably see a lot of the same stuff. It's kind of like just a mini Home Depot, they're doing a lot of the same things. Very attractive space. About as Amazon-resistant of a business as we're going to find.

Alright, no Steve Broido behind the glass this week, but we will get to the stocks on our radar. Ron Gross, you're up first. What are you looking at this week? I got LCI Industries, ticker LCII. For those who might know this company, it used to be called Drew Industries. They recently changed their name at the end of 2016. They are a components manufacturer for original equipment manufacturers of RVs, and to a lesser extent buses and trailers. They've been rolling up a very fragmented industry. They've bought almost 40 companies over the past 16 years. We've got some good trends, retiring baby boomers, reasonable fuel prices, stable economy that should drive the expansion cycle for

RVs, significant growth potential overseas, recently increased their dividend by 67%, now has a 2% yield. I think this one looks pretty good. Jason Moser, what are you looking at? I'm going to stick with the retail theme, and next Wednesday we'll see Williams-Sonoma earnings. Ticker is WSM. Decent business. They're doing well with e-commerce. The problem is, they are not doing well with their traditional retail, and so it is a business that is really, I think, in a little bit of a decline. Having gone through Wayfair's most recent results, I think that Wayfair has taken a lot of their business. I don't think these guys have any

pricing power. Margins are getting squeezed. Top-line challenges exist. Sounds very familiar. Yada, yada, yada. I don't think I want to be owning this stock today. I think it's going to get a lot cheaper. And I don't necessarily mean cheap in the good way. All right. Jason Moser, Ron Gross, thanks for being here. Thanks, Chris. This week, shares of Herbalife took a hit after the Chinese government pledged to eradicate multi-level marketing firms. Up next, we'll revisit our interview with Ted Braun, director of the Herbalife documentary, Betting on Zero. Stay right here. This is Motley Fool Money.

All right, before we get to the interview with Ted Braun, I want to say thanks to 23andMe.com. 23andMe.com is a genetic service that can help you discover where your DNA comes from around the world. You can learn what percentage of your DNA comes from places like Italy, Finland, East Asia, Africa, and more. And with your 23andMe reports, you can explore your connection to the world in a whole new way by traveling to the places that reflect your DNA. Visit 23andMe.com slash fool. That's the number 23, A-N-D-M-E dot com slash fool. What will be your DNA destination?

And now, let's talk Herbalife. Welcome back to Motley Fool Money. I'm Chris Hill. The biggest showdown on Wall Street over the past few years has been about Herbalife, a company in the business of nutritional supplements. Herbalife has been called the best-managed pyramid scheme in the history of the world by hedge fund manager Bill Ackman. And that battle between Ackman and Herbalife is the subject of the new documentary film Betting on Zero. Joining me now from Los Angeles is the film's director,

Ted Braun. Ted, thanks so much for being here. Pleasure to be with you, Chris. Thanks for having me on. Your first documentary film was about genocide in Darfur. What got you interested in making a film about the battle between a hedge fund manager and a company like Herbalife? I came back from Sudan, oddly enough, curious about the place of money in American life. I was in a country where an entirely different set of values were operating. People were motivated by a very deep desire for a functioning justice system. They were motivated by a desire for the international community to come and protect them. And all of that made me appreciate in a way I didn't quite fully understand how central money was to our sense of ourselves as Americans, to our way of resolving disputes, our sense of social class, and in many cases, even our sense of self-worth.

And that had just been kind of rattling around inside of me for a couple of years. And Glenn Zipper, the producer of this film, approached me with a line on financing a film set in the world of American corporate conflict. And among a host of different ideas that we were considering were two or three sentences about Bill Ackman and his fight with Herbalife. And that conflict, which pitted two very unlikely antagonists against each other, seemed to have the makings for a good, substantial feature documentary that would also allow me to explore this interest in money and its place in the American dream. I want to get to Ackman in a second, but you've got people in this film who are involved in Herbalife. And Herbalife is, I mean, if you asked someone at Herbalife, tell me about the business, they would talk about nutrition and how this is a company all about helping people lead healthier lives. watching your film, it is clear that largely, if not entirely, it is a company that is a

multi-level marketing company. It is all about recruiting other people to sell Herbalife products, and the profits flow up that way. And what blew me away was just the very, personal stories that you tell here with people in big cities like Chicago, but also smaller towns in Oklahoma who get involved with Herbalife and end up, in some cases, losing their life savings. Those are stories that, you know, looking into this subject, you come upon often. And they counterbalance the stories that Herbalife presents of people leading healthy lives and people realizing their financial dreams and part of what intrigued me about making this film was was trying to sort through these competing claims about what the company was was actually offering

people and and what kind of promise it was holding out to them as alluring as the the the dream that herbal life was offering people uh was the the losses that uh that people were suffering was emotionally very affecting and moving. And so the film tries to dramatize these conflicting views of other company and take viewers on a path towards sorting them out. You mentioned The American Dream, and that's one of the things I was thinking about during a scene in your film, and yours is a documentary film. And yet I was reminded of a scene in the movie The Big Short, where in The Big Short, the American dream is represented by American housing. Everyone wants to own a home. And you have people in The Big Short who are selling

homes to people who really have no business owning a home. They just don't have the financial means to do so. And in your case, in your film, it's Michael Johnson, the longtime CEO, who stepped down as CEO last year. He's still chairman of the board. But a video of him talking about how we're all about recruiting. This is an internal video where he's telling we're all about recruiting. You need to recruit people to sell our products no matter who they are. And I thought, well, gosh, that's kind of like the big short, only it's recruit people to sell even if they have no business being in the business of selling anything. recruiting and its place in Herbalife's business was a central question that Mr. Ackman raised

and that is central to a definition of a pyramid scheme and whether Herbalife's profits are drawn principally from recruiting new members or from retail sales outside of the network of distributors The dramatic question Ackman pressed throughout his long campaign against Herbalife, and one that ultimately the Federal Trade Commission in their settlement with Herbalife last summer came down with a very clear verdict about, and the verdict was quite damning. They found Herbalife in violation of federal law. They charged Herbalife with four counts of false, deceptive, and unfair business practices. And the centerpiece of the complaint was this issue of recruiting versus retail sales. And they found that the company was a company that relied upon recruiting people and in that way vindicated what Mr. Ackman had been alleging for the last several years.

Bill Ackman, for those unfamiliar, is a billionaire hedge fund manager. And he gets involved because he sees a company stock that he thinks is ripe for shorting and gets involved, first in kind of a small way with a small short and then increases his position. And it's interesting to watch this play out in your film because Ackman is so convinced he is right, which, and we talk about this on the show from time to time, it's one thing to buy shares of a company and bet on it to go higher. You almost need a stronger conviction and a stronger stomach to short a stock and bet on it to go down, because you can be right in the long run, but in the short run, you can get crushed. And in the case of Bill Ackman,

right out of the gate, he's looking very much correct, both in terms of his conviction and in terms of what's happening with the money, with the hundreds of millions of dollars that he has put at stake on this short. And then it's not too long before he starts to lose in a very big way. When you were going through this process of making the film, of following Bill Ackman, what did you observe about his temperament throughout the process as this begins to go very badly for him and for his investors. He was remarkably steadfast and unwavering in his convictions. In the most challenging hours of this conflict, you know, stay the course. And that conviction and steadiness, I think, was one of the more fascinating parts of him as a character.

and it's something that I think the film probes and explores. Where does this conviction come from? To some extent, it comes from an enormous amount of confidence in his analysis, though the phrase never made it into the finished film. At one point in an interview with me, he said he felt that in most cases, investments involve a certain degree of uncertainty, But in this case, he felt that his analysis was solid to a degree of absolute certainty, which is fascinating and unusual. but there was also to him a moral dimension of this investment,

a belief, a conviction that he was doing something that was good not just for his investors but for the country as a whole, which elevated the conflict and incited the ire of a number of people who were on the other side of the trade from him and in particular from Michael Johnson, the CEO of Herbalife, who at one point very early in the conflict said that America would be better off without Bill Ackman. But that moral certainty, and it actually led him to say that even if he were to decide to get out of the investment, he would continue to pursue Herbalife. That makes for a very unusual and interesting character in a film and a very unusual and interesting

Wall Street figure. You just don't see that every day. Yeah. I mean, Bill Ackman, beyond the fact that he's a billionaire has a reputation for being arrogant. So, the fact that you've made a reportedly arrogant billionaire come off as a sympathetic character that the audience is largely rooting for is a pretty amazing accomplishment. Speaking of billionaires, this is a story that gets more interesting when a billionaire jumps in on the other side of the equation, and that's Carl Icahn. This is part of why the investment, the short of Herbalife stock begins to go badly for Bill Ackman, is because Carl Icahn comes in and buys about 10%, 12% of the company. Correct me if I'm wrong, but I think the main reason Carl Icahn

buys the stock is not because he believes this is an amazing business that's changing the world for good. I think he just hates Bill Ackman's guts. That's certainly the view of William Cohen, the Vanity Fair writer who has observed both men at close range and written about both of them at length. He wrote about their battle for Vanity Fair, a famous piece published in 2013. And I think there's a lot of evidence to support that. Mr. Icahn claims that this is nothing more than a good investment for him, that he believes in the company and thinks that he's made simply a smart and shrewd decision about where to invest his resources. But the timing of his stock purchase and the fact that it occurred very shortly after he

had a famous battle with Ackman on CNBC television, a battle that I'm sure many of your listeners are familiar with. One of the most colorful episodes in business television ended in name calling and a lot of really nasty rhetoric exchanged between the two of them has led a lot of people to believe that this is nothing more than a real act of vengeance and feud on a personal level. It certainly makes for a very colorful film. Coming up, we'll talk about just how badly Herbalife does not want you to see this film.

You're listening to Motley Fool Money. Welcome back to Motley Fool Money. Chris Hill talking with Ted Braun, director of the new documentary, Betting on Zero. One of the things that you show very vividly in your documentary is something that you've alluded to, and that is Michael Johnson, the CEO of Herbal Life, and the reaction to Bill Ackman's short. It would be one thing if Ackman was not so public about it, but he's very public that this is not just what he believes to be a good business decision. He makes it very personal. And Herbalife doesn't just sit on their hands feeling insulted.

They go after Bill Ackman. They do everything they can to boost their profile, bringing in high-profile athletes to promote the Herbalife brand. They don't sit still when they feel like they're being attacked. All of that, Ted, is prelude to this question. Now that your film is out. What is Herbalife's reaction to your documentary? Well, it's been disturbing to say the least. I had no agenda when I set out to make this film. I thought the antagonists in this battle had competing and very interesting claims. And I was interested in dramatizing this problem. You said you found it surprising to feel sympathetic for Bill Ackman. And I think one of the goals of good documentary filmmaking, as with any kind of good storytelling,

is to get the audiences into the shoes of people they would not otherwise know or understand. And I very much had the goal of getting the audience into the shoes of both Mr. Ackman and Julie Contreras, and there was her campaign, and Herbalife and its executives. Ultimately, despite two-plus years of conversations with Herbalife that continued right up until the time that we locked the picture, that we stopped editing the film. They declined to participate in the film. We engaged in conversations.

I spoke with a number of their executives, Michael Johnson, Alan Hoffman, as well as a number of their distributors. A lot of off-the-record conversations to help me understand what was going on with the company. But ultimately, they declined to participate. Fair enough. No rule that says you have to participate in a documentary film, especially when your company is under fire.

I can understand that. But within weeks or two of announcing that the film was premiering at Tribeca Film Festival in April of last year, one of their lobbyists in Washington, D.C., Hillary Rosen, tweeted to Jane Rosenthal, Robert De Niro's partner at the Tribeca Film Festival, that the Tribeca Film Festival's reputation was at stake because they were screening this film, that the film had been bought and paid for by Bill Ackman. This was not true. This was a falsehood. And Ms. Rosen tweeted this without disclosing the fact that she was a paid, and her firm, Knickerbocker, was a paid consultant, a lobbyist for Herbalife. And this sort of intimidation went on after the film premiered. And then these overt and covert efforts to undermine the film and prevent people from seeing it reached a sort of crazy culmination in October when we were screening at the Double Exposure Film Festival in Washington, D.C., a festival devoted to investigative filmmaking. And we were the featured Friday night film, and Friday afternoon the festival discovered an unusual pattern of ticket purchases. The film had sold out well in advance of the screening,

and it turned out 173 seats, exactly half the house of the National Portrait Gallery, had been purchased by another Herbalife lobbying group, Heather Podesta and Partners. Ten members of Heather Podesta and Partners had purchased 173 seats. Ultimately, they didn't claim the seats, leaving the theater, which would otherwise have been sold out, half empty. But, you know, it was a film devoted to investigative filmmaking, and so there were a lot of investigative journalists at the screening. And this sort of attempt to subversively undermine the film and to prevent people from seeing it caught the attention of a lot of the press there and ended up being a story in Politico and The Wall Street Journal, The Washington Post, and The New York Post, and ultimately ended up on John Oliver's program last week, tonight, at the end of the month, just before the election.

But these are troubling actions on the part of a company that has an opportunity to participate in the film, and most of them were taken without ever having seen the film, as a sort of reflex against what something, I guess, they felt was threatening to them. I don't think it's very healthy for a capitalist economy to have companies attacking and undermining films that are effectively attempting to promote a constructive conversation about what's going on. So where do you think this is going in terms of Herbalife's business and therefore in terms of Herbalife's stock price? One of the things that you establish very early in the film is that Bill Ackman, when it comes to shorting a stock, is nothing if not patient. In one example, he waited seven years for a short of a stock to pay off. And he's a lot younger than Carl Icahn.

So I'm just curious if you have any gut feeling of where this is going over the next couple of years. i have been endlessly surprised by how this battle has unfolded and would be a fool to speculate or to pretend to know where it's headed next um i the one really substantial development that's happened since we started making the film was uh the announcement last summer that the ftc had settled with Herbalife had settled a long-standing investigation that culminated in them charging Herbalife with violations of federal law. And as part of that settlement, the FTC required Herbalife to fundamentally restructure its business to basically invert their model and derive almost 80% of their revenue, not from

recruiting, but from retail sales. If that order is enforced and Herbalife substantially changes its business practices, it'll be a very different company from the one that Mr. Ackman first shorted. If they don't, they'll be under, presumably, some fairly strict court orders and court-appointed auditors monitoring what they're doing, and I think they'll be in a lot of trouble. The question of whether or not they'll be able to wriggle out of that is the question of the day at the moment for Herbalife. Betting on Zero is in theaters around the country now

and is available on iTunes in April. For more information, you can go to bettingonzeromovie.com. Ted Braun, thank you so much for being here. Chris, a great pleasure. Thanks for talking to me about the film. I'm glad you enjoyed it and I hope your listeners do too. That's going to do it for this week's edition of Motley Fool Money. Our engineer is Steve Broido.

Our producer is Matt Greer. I'm Chris Hill. Thanks for listening. We'll see you next week