October 02, 2017
2017 2Q Review: Another Step Back
With several companies raising their respective outlooks following their first-quarter results, we had thought the operating environment for direct sellers was looking up; we were wrong.
Each of the five U.S.-based publicly traded direct sellers with more than $1 billion in equity market cap disappointed investors with their second-quarter results, either in the results themselves or in the corresponding outlook for the remainder of the year. On average, stocks for the group declined 7 percent on the next trading day after results were reported, with each individual stock showing declines. See Exhibit 1 below. This is not surprising, considering, as shown in Exhibit 2 on page 16, the sharp deceleration in organic sales growth experienced by the group in the second quarter.
Herbalife (HLF) and Nu Skin (NUS) had been keeping expectations low for the second quarter, so those stocks dropped the least on reporting day, down 2 percent and 1 percent respectively. Herbalife had issued a press release in early June warning of softness primarily due to the focus on FTC settlement implementation in the U.S. and a shift to new leadership in China, as well as unexpected softness in Mexico; its stock had drifted downward heading into the second-quarter release in early August in anticipation of tepid results. Nu Skin had been emphasizing all along how tough comparisons were in the second quarter following the success of its Limited Time Offer program in the year ago quarter of ageLOC Youth and ageLOC Me, so while results were soft, they were about in line with expectations.
Tupperware (TUP), Avon (AVP) and USANA (USNA) fared less well with their stocks declining on their reporting days by 8 percent, 11 percent and 11 percent respectively.
Tupperware’s decline was a sharp reversal from the first quarter when it beat its forecast and raised its full year outlook. In the second quarter, recent challenges in Indonesia, a large market for them, seemed to worsen, offsetting continued strong performances in China and Brazil. Emerging markets (69 percent of total sales) continue to perform well overall, up 6 percent in local currency sales and accounting for more than all of the growth since developed markets declined 7 percent. Along with the second-quarter release, the company announced significant restructuring initiatives, most notably the shuttering of its flagging BeautiControl business in the U.S. and efforts to improve profitability in Europe, where margins have come under pressure over the past several years. Europe used to be the most profitable among its durables businesses but has fallen behind.
Once again Avon stock declined double digits following its second-quarter report. Organic growth decelerated to -4 percent from -1 percent in the first quarter and 0 percent in the fourth quarter. While management reiterated its fiscal year outlook for positive organic sales growth, 100-140 basis points of adjusted operating margin expansion and a return to slightly positive free cash flow, with the soft second-quarter results, management indicated full-year results would come in at the low end of expectations. Concurrently with the release, the company indicated that CEO Sheri McCoy would step down early next year and a search for a replacement is underway. With the company in the middle of executing a multi-year transformation plan following years of fundamental deterioration, an extended period of time at this point with a lame duck CEO does not inspire confidence, which is reflected in the stock price declining an additional 17 percent in the weeks following the 11 percent decline on reporting day.
USANA also reported results below expectations, which the company attributed to the maturing of its business in the Philippines, a slower than expected launch in Indonesia as well as continued challenges with My Smart foods, a recent entry into the food category for this company, which has been traditionally known for nutritional supplements. Management also noted that there have been numerous changes in leadership over the past year, including making a co-CEO the sole CEO, a new President, CFO and CIO and others in science and field development.
IT enhancements seem to be a common underlying theme among direct sellers these days. For example, USANA’s new CIO is working with expanded budgets for IT enhancements that the company believes will deliver a superior customer experience and allow for more flexibility on many business drivers including promotions and incentive offerings. Additionally, after spending a year developing the technology infrastructure needed for compliance with its FTC settlement, Herbalife has hired an outside customer relationship management vendor, Salesforce, to help manage the newly minted data gathering systems in order for the company and its distributors to understand its end customers better and create a more personalized experience for them.
We recently visited Salt Lake City and saw how technology is driving a change in business models to adapt to the new “social selling” concept of using social media to build businesses. Sales leaders act in much the same role as blogger influencers to get people in their networks to try products and then have the word spread from there. New products are being developed specifically with social selling in mind that come with a lower price point and are easily demonstrable. Companies are developing technology-based tools to help sales leaders manage their businesses using social media, and compensation plans are being modified for quicker payouts.
More than once did we hear Uber mentioned as an alternative source of quick home-based income, so new business models such as that one also have entered the competitive set with regard to capturing entrepreneurial home-based business builders.
To that end, we note that Stockholm-listed direct seller Oriflame had its stock increase by 11 percent when it reported earnings on good results and stated, “During the quarter, the utilization of mobile apps continued to increase together with the share of website visits from mobile devices. More than 10 percent of global orders are now being placed using the Oriflame app… in total, the Oriflame app suite generates more than 5,000 new users daily, making it the fastest-growing digital channel in the company.”
This may help explain why Nu Skin went to Silicon Valley for its new CFO.
Disclosure: Douglas M. Lane and members of his household own equity and/or equity derivative securities in Herbalife Ltd., which had previously been publicly disclosed in a Direct Selling News article originally published in January 2013. Other than mentioned above, neither I, Douglas M. Lane, nor a member of my household, owns any security(ies) which is/are the subject of this article. Neither I, nor a member of my household is an officer, director, or advisory board member of the issuer(s) or has another significant affiliation with the issuer(s) that is/are the subject of this research report. I do not know or have reason to know at the time of this publication of any other material conflict of interest.