Financial Analysis

Public Direct Sellers: Business Slowed a Bit in the Fourth Quarter; Lots of Changes at Nu Skin Under CEO Ritch Wood as the Company Reinvents Itself for the Digital Age.

Nu Skin Enterprises held an Investor Day at its headquarters in Provo, UT, at the end of February. Nearly two years into Ritch Wood’s tenure as the company’s CEO, after being its long-time CFO, it’s clear that the company is reinventing itself for the digital age. Social commerce is disrupting ecommerce as the world moves towards the gig economy, social media and mobile connectivity.

Management articulated its vision to become the world’s leading business opportunity platform, connecting entrepreneurs with customers by way of a three pronged “grow strategy”: engaging platforms, enabling products and empowering programs.

Engaging platforms are designed to offer customers mobile connectivity, seamless transactions, simplicity & speed and global integration. To this end the company took the dramatic step of taking a $70 million charge in the 2018 Q4, including $49 million to write down internally developed information technology assets and $20 million of employee severance, to move to cloud technology using established partners such as Amazon Web Services and Alibaba’s Aliyun. This will give the sales force the platform with which to build a sociallyenabled business.

Enabling products is focused on developing a sustainable growth model for attracting and keeping customers via a multi-dimensional strategy. The company is looking to step up its innovation across its foundational brands including extensions for its ageLOC Lumi Spa and Galvanic and Facial Spa lines in the beauty business. On the nutrition side, the company highlighted its recently acquired Groviv business, which features Controlled Environment Agriculture (CEA) technology. CEA technology offers pure, safe and effective ingredients, high density nutrients, traceability from seed to solution and sustainable sourcing. The company expects to introduce its first products from Groviv by the end of the year.

Empowering programs help customers lead an independent, flexible lifestyle by offering an earnings opportunity and a sense of community and purpose. The company has developed and been rolling out its new “Velocity” business opportunity, which is more flexible and gets money into entrepreneurs’ pockets faster. While leadership checks still go out monthly, the company now offers weekly and even daily payment offerings to compete with other homebased business opportunities like rideshare and home rental concepts. In markets where it has introduced Velocity, customer acquisition is up +26 percent, resulting in a +16 percent increase in average customers. The number of people being paid under Velocity is up +44 percent from pre-Velocity levels.

Management talked at length about how Nu Skin is well positioned to be successful within the millennial market, where the broad consumer trend towards wellness and being good is important. The company said that globally the average age of people coming into the business has declined 10 years over the past 2 years. On the product side, innovation in beauty and skin care under the ageLOC franchise coupled with the innovation opportunities on the nutrition side with the CEA technology should feed right into that demographic. Add on the technology enhancements to allow the business to be managed from a mobile phone coupled with the charitable endeavors the company has championed over the years. For example, Nourish the Children where 600 million meals have been donated to malnourished children since 2002. We would not be surprised to see a much different profile for Nu Skin’s sales leadership in the years to come.

Through February, our Direct Selling index has largely kept pace with the market’s +11 percent gain since the beginning of the year. However, since September’s highs, our index is down -8 percent vs a -4 percent decline in the overall market. The market must have been sensing a slowdown in the Q4 for these companies, and, as usual, the market was right.

Four of the six Direct Selling companies with over $1 billion in equity market capitalization that have their primary stock listing on the New York Stock Exchange saw organic sales growth, which excludes the impact of currency exchange rates and acquisitions/divestitures, decelerate sequentially from Q3 trends. Only Optavia, which now accounts for 95 percent of Medifast’s total sales, and Avon Products, Inc., which does not include the North American business, improved. Optavia, which is now approaching a hyper-growth phase, grew +102 percent in the Q4, up from +98 percent in the Q3. At the other end of the spectrum, Avon Products, which is in the early days of a comprehensive business transformation, saw organic sales declines moderate to -2 percent in
the Q4 from -4 percent in the Q3.

Despite the deceleration overall in the Group, much of that was because many of the companies were lapping more difficult comparisons in the Q4 of 2017, when business seemed to be getting traction, particularly for the wellness companies. Therefore, we would continue to characterize business at Herbalife and USANA as robust, as both companies continued to post double-digit organic growth rates in the Q4, and Nu Skin reported a very respectable +3 percent organic growth rate on top of a very difficult +22 percent comparison a year ago; coming into 2018 we were thinking the Q4 could very well be a negative number.

Only Tupperware saw a marked deterioration in business trends in the Q4. The organic sales decline of -6 percent was the biggest decline since the 2005 Q4. Cash generation has deteriorated substantially, and the company was forced to cut its dividend for the first time ever as an independent public company. It appears that a turnaround there will be more heavy lifting than we previously thought.