Herbalife just made a massive change to some of its member data, and now the stock is crashing (HLF)

HERBALIFE (Independent Distributor)/Flickr

Herbalife just made some big corrections to how many active members it actually gained last year.

Shares fell by as much as 15% in premarket trading on Thursday after a regulatory filing showed that Herbalife on Tuesday found "errant information" in the data it had given investors during earnings calls.

For its fitness supplements, Herbalife operates through a distribution network of millions of people worldwide who are paid through a multilevel marketing structure.

This model has attracted the intense scrutiny of hedge fund manager Bill Ackman, who is short the stock. The company is under a federal investigation.

The filing says the mistakes were due to database scripting errors. From the disclosure (emphasis ours):

The Company began tracking this non-financial metric in 2015 in connection with certain marketing plan changes and discussed it for the first time on its second quarter 2015 earnings call. However, database scripting errors led to both (i) the errant inclusion of additional categories of data in calculating the metric for parts of 2015 which were not included in the 2014 and prior period calculations and (ii) quarterly aggregation issues which created variances from period-to-period depending on when the greatest level of activity occurred during the relevant period. The Company did not discover these errors earlier because it had limited visibility into the likely rate of change in this metric upon its first use. The Company has taken corrective action regarding these issues.

For example, the growth of worldwide active members (excluding China) in the fourth quarter of 2015 was reported as 16.7%, but now the company says the correct value is 3.2%.

In Q3 2015, Herbalife quoted 33% growth for new members and North America, but it has now revised it down to 1.8%. For the full year, growth was revised down to 3.4% from 8.3%.

There were some upward revisions as well among the nearly 30 restatements.

Herbalife shares have had a good year so far, as they're up 5%. They have rallied 81% over the past 12 months.

Here's a chart showing the drop in trading on Thursday:

HERBALIFE (Independent Distributor)/Flickr

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