With about 4,000 employees, nutritional supplement maker Herbalife Ltd. would seem to be a decent sized company. Yet that number pales in comparison with its network of independent distributors, who number nearly 2 million.
By keeping payroll small while revenue rolls in from millions of sales reps, the downtown L.A. company has kept costs down and profits high – so high that it recorded an astounding 81.1 percent return on equity over the past few years.
“We kept a very lean infrastructure,” said Chief Operating Officer Richard Goudis.
In fact, Herbalife easily topped the Business Journal’s annual ranking of most profitable companies in Los Angeles County based on three-year average return on equity as of June 30. (See list on page 22.)
Herbalife did have a few things in common with other companies reporting strong return on equity. Many of those also were lean and mean – and raking in the green.
In fact, this year, fully half of L.A.’s 10 most profitable companies have fewer than 200 employees, well below the government’s 500-employee threshold to be considered a small business. The highest-ranking companies come from a variety of industries, but many have business models that simply require few employees.
Cherokee Inc., an apparel licensing company in Van Nuys, was the second most profitable local company despite having just 20 employees running all of its operations. Another, even starker, example is Peerless Systems Corp., which has just five employees handling its software licensing business. With a 36.6 percent average return on equity, the company ranked No. 7.
Some other companies showing good profits benefited from market trends. High-end retailers, such as True Religion Apparel Inc. (No. 8) and Guess Inc. (No. 10), rode a modest recovery in their industry.
Herbalife directly benefited from its multilevel marketing business model, which in the past has been plagued by lawsuits alleging that it’s nothing more than a pyramid scheme. In response, the company tightened up control over its selling networks, requiring the majority of its products ultimately to be sold to end users.
It also juiced up its marketing and entered growth mode. The company sponsors more than 100 athletes, teams and sporting events, including the Los Angeles Galaxy soccer team and the Tour of California bike race. The point is to associate the brand with healthy and active lifestyles.
“We’re getting behind the brand more, we’re spending more on advertising and promoting the brand more than ever before,” Goudis said.
Cherokee, on the other hand, has been merely content to ride its consistently high returns.
Founded in 1971, the company had been a manufacturer of clothes and shoes, but a heavy debt load forced Cherokee into multiple bankruptcy reorganizations. As a result, the company today has no manufacturing or inventory operations, which executives said keeps costs and risk low.
As a purely licensing company, Cherokee, which sells its casual apparel at Target and other retailers, has been able to stay profitable despite a recession-related dip in revenue. (Target actually manufactures the clothes sold at its chain.)
“Because we only have 20 employees, we’ve managed to maintain pretty steady profits,” said Russell Riopelle, Cherokee’s chief financial officer.
Another class of companies, high-end apparel businesses and premium denim makers, also performed well, despite still slow consumer spending.
True Religion Apparel had a 33.4 percent return on equity and Joe’s Jeans a 26.1 percent return. True Religion came in at No. 8 on the list and Joe’s Jeans at No. 12.
“They’re dealing with a much more affluent customer in general and affluent customers have certainly come back much quicker,” said Dorothy Lakner, an analyst with Del Mar-based Caris & Co. who follows True Religion. “In general, across higher-end companies, we’ve seen more of a pickup in spending than at the lower end.”
True Religion also has been helped by its relatively lean staffing, Lakner said, but that’s not to say it is not growing. The company has introduced new product lines and expanded its company-owned retail branch network.
“Premium denim has been a pretty competitive business, but True Religion has done a good job staying unique,” Lakner said.
Then there are the laggards. Though there are some signs of recovery in the financial services and real estate markets, companies in those sectors have had a rough go over the past three years.
Banks such as Beach Business Bank (No. 119) and Preferred Bank (No. 130), as well as commercial real estate companies including Meruelo Maddux Properties (No. 142) and CB Richard Ellis Group (No. 145), all had negative returns on equity.
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