Supplement Maker Shakes Out as Most Profitable

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Supplement Maker Shakes Out as Most Profitable
Herbalife nutrition club.

Here’s no surprise.

Fueled by growing worldwide sales and aided by a lean distribution system, downtown L.A. nutritional supplement maker Herbalife Ltd. remained the most profitable public company in Los Angeles County last year.

But here is a surprise.

Despite an improvement in corporate earnings nationally and countywide, most companies at the top of the Business Journal’s annual ranking, based on three-year average return on equity, didn’t have stellar performances last year. (See list page 26.)

Of the 10 most profitable local public companies, only Herbalife and Guess Inc. (No. 6) saw higher single-year returns on equity in 2010 than in 2009. Only one, apparel licensing company Cherokee Inc. (No. 2), saw an increase in its three-year average return.

The others went south. For example, third-ranked U.S. China Mining Group Inc., a City of Industry company with mining interests in China, saw its return on equity fall more than half to 15.3 percent. And No. 5 Arden Group Inc., the Compton parent of upscale Gelson’s Markets, fell from 35.8 percent to 23.5 percent.

The lower returns show that a company’s performance is tied more to its circumstances than to general business conditions.

Consider Vernon frozen-food maker Overhill Farms Inc. The No. 4 company on the list had a 30.1 percent three-year average return on equity, but that was pulled down by a 21.5 percent ROE last year that was almost one-third smaller than in 2009.

Overhill makes frozen meals for grocers, restaurants and airlines. Company board member Alexander Auerbach said price-conscious consumers, price-cutting competitors, and higher fuel and energy costs made last year tough.

“Because consumers’ budgets are under stress, shopping is affected,” Auerbach said. “We’ve had to adjust our production to be as efficient as we can with smaller runs. It’s been a continual battle, searching for small efficiencies.”

The company reported that net income for its 2010 fiscal year ended Sept. 26 fell 8.7 percent to $7.58 million on a similar drop in revenue to $194 million.

Fashion blues

Slumping sales and price-cutting rivals weren’t been the reason for the reduced profitability of others near the top of the list.

No. 7 True Religion Apparel Co., another Vernon business, makes pricey premium denim jeans and other apparel. Its three-year average return on equity was a healthy 28.2 percent, but it also saw its annual ROE fall nearly one-third in 2010 despite a 16.9 percent boost in sales.

Dorothy Lakner, managing director of Caris & Co. in New York, who follows True Religion, said the company had flat earnings and a lower return on equity in part because it invested in new stores. It opened 24 locations last year.

“Investing in those has caused (earnings) to be flat, despite some impressive growth,” she said, adding that having its own stores rather than being a wholesaler should ultimately make True Religion more profitable.

Like True Religion, another premium jeans maker high on the list, No. 10 Joe’s Jeans Inc., with a 23 percent three-year average return on equity, saw its sales rise last year. But its annual ROE fell to 4.1 percent from 50.3 percent in 2009. How is that possible?

David Griffith, a senior research analyst who follows Joe’s Jeans for Roth Capital Partners LLC in Newport Beach, said a tax windfall in 2009 dramatically improved the company’s earnings and return on equity that year.

The tax benefit boosted its fourth quarter net income by $17.6 million. That accounted for the lion’s share of the company’s 2009 profits of $24.5 million.

“Thirty-three out of 40 cents (of earnings per share) was from the tax asset,” Griffith said.

By contrast, the company recorded only a $2.6 million profit last year despite higher sales.

Then there is Herbalife. The downtown L.A. maker of health supplements posted an average return on equity of 80.2 percent over the past three years, topping other companies by a wide margin.

The company is rapidly growing overseas but that expansion isn’t requiring big investments. Instead of building stores, the company can expand its reach by adding to its stable of more than 2 million independent distributors, who have products shipped to them.

The only place the company is footing the bill for expansion is China, where the government has barred sales from homes, requiring Herbalife to front capital for 70 storefront locations. However, sales are growing quickly in what soon may become the world’s largest consumer market.

“It’s a pretty high-return business, period,” said Timothy Ramey, a senior vice president with DA Davidson & Co. in Lake Oswego.

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