August 01, 2017
2017 First Quarter Review: Things are Looking Up
After a very soft finish to 2016, the larger publicly traded direct sellers mostly got off to a good start in 2017. Organic growth improved sequentially in the first quarter (1Q) of 2017 versus the 4Q of 2016 for Herbalife, Nu Skin and Tupperware, and remained strong for USANA albeit at a slower pace. Avon continues to show soft trends with organic growth back in negative territory at -1% in the 1Q after being flat in the 4Q.
The chart on page 16 depicting stock price movements during the trading day that followed the quarterly releases reflects these trends. Stock movements improved markedly for Herbalife and Tupperware, shooting up in the double digits following 1Q results versus the mid-single digit declines that occurred following the 4Q reports. Nu Skin and USANA stock performance following their respective earnings reports also showed sequential improvement, while only AVP showed weakening trends. Combined Avon has given back the equivalent of -40% of its equity market capitalization over the past two earnings reporting periods and is currently down nearly -50% from recent highs in October 2016, although still well above multi-year lows last hit in January 2016.
Exhibit 1: STOCK PRICE MOVEMENT ON TRADING DAY FOLLOWING QUARTERLY EARNINGS REPORTS
Source: Yahoo Finance, Company reports, Lane Research estimates.
Some common themes surfacing in the 1Q reporting cycle:
- 1. China remains a challenge. Absent a demand pull-forward from the 2Q as a result of a price increase announced to take effect on April 1, in the 1Q Herbalife would have seen something close to the low-double-digit decline in volume points that it saw in the 4Q as business there has clearly slowed. During the 1Q USANA announced it is voluntarily opening a Foreign Corrupt Practices Act (FCPA) investigation, and Avon does not seem to have recovered from its highly publicized FCPA investigation and settlement from a few years ago, with CEO Sheri McCoy stating on the 1Q conference call that China is not even a top 15 market for them at this point. The other larger direct sellers have China as a top 1 or 2 market globally, except Tupperware where it is still among the top 7. The exception is Nu Skin, where China grew organic sales by +33% in the 1Q, a sharp improvement from the 4Q, albeit on the easiest comparison of the year, and Tupperware continues to cite China as a key growth driver of organic sales as well.
- 2. Currency pressures are abating. The relentless rise in the dollar over the past five years has put immense pressure on the dollar-reported sales and earnings for these companies. We had estimated that Avon, Herbalife and Tupperware alone have lost an aggregate of more than $1 billion in dollar net income during this period. For the first time since the 2011 3Q, currency exchange was actually beneficial for Avon in its 2017 1Q, due primarily to the sharp rise in the Brazilian real versus the 2016 1Q. Similarly, the impact from currency exchange to Herbalife and Nu Skin was only -2% and -1% respectively in the 1Q, and Tupperware was currency neutral in the quarter, the first non-negative quarter for them since the 2011 3Q as well. Looking forward, if rates stay where they are today, foreign currency exchange rates should benefit just about everybody by the 2017 4Q, with only the Japanese yen and the Brazilian real showing modest depreciation versus the dollar on a year-over-year basis among major currencies impacting direct sellers.
- 3. Momentum Indicators Remain Sluggish. The indicators that we use to monitor the underlying momentum of the businesses on balance remain soft. On the upside, USANA continues to have the strongest underlying momentum with organic sales growth and active associates growing firmly in the mid-single digits, the fastest among the top 5 public direct sellers, although it is a deceleration from the even stronger trends in the 2016 4Q. Tupperware showed the best acceleration from 4Q to 1Q in momentum indicators and NUS showed nice improvement in organic sales growth, but average active sales leaders continues soft. Conversely, Avon momentum indicators are each flat or down, and on balance showed a decelerating trend from the 4Q into the 1Q. Herbalife showed slight sequential improvement in organic sales growth, and while average sales leaders with volume points decelerated sequentially they still remain in positive territory. On average for the top 5 names, organic sales growth accelerated modestly in the 1Q from 4Q trends while rep activity decelerated modestly. (Exhibit 2 above)
Exhibit 2: ORGANIC SALES GROWTH
Source: Company reports
Outlooks Reaffirmed or Raised
In conjunction with the 1Q releases, 2017 full-year outlooks were raised at Tupperware and Herbalife, maintained at Nu Skin and USANA, and initiated at Avon for the first time in years. Unfortunately, due to softness associated with the implementation of its FTC mandate in the U.S., Herbalife had to turn around and lower top line expectations a month later, but the company actually raised its full-year EPS outlook modestly at that time.
On balance, local currency sales growth for these names is expected to grow in the low- to mid-single digits in 2017, with Nu Skin and USANA at the higher end of the range and Avon and Herbalife towards the lower end. EPS growth varies widely as Avon could show a high percentage gain off of a very low base given its current depressed operating margins, while Herbalife and USANA are looking to report lower EPS this year due mostly to non-operating influences. Tupperware and Nu Skin look for EPS to grow in a more normal range of mid-single digits to low-double digits.
From where we stand today, 2017 1Q results compelled the most bullish change to the outlook for Tupperware, while the others remain what we would characterize as cautiously optimistic, with on balance a more upbeat tone resonating in the press releases and on the conference calls versus the 2016 4Q. It looks like a lot of 2017 is riding on 4Q results, so we’ll wait and see. At least the comparisons are easier.
Douglas M. Lane, CFA, is a securities analyst with more than 20 years of experience covering companies that employ the direct selling business model. He recently launched a boutique equity research firm, Lane Research, focusing on those companies. His website is www.laneres.com.