May 01, 2012
May 2012 — A Robust Q1 on Wall Street and Stronger Main Street
by Scott Van Winkle, CFA
It has been a good quarter to be invested in stocks. The S&P 500 rose 12 percent during the first quarter and the Nasdaq Composite jumped 18 percent. The direct selling group has posted an average gain similar to the Nasdaq and only a handful of direct selling stocks failed to participate in the rally. The broader market performance is well beyond the scope of this commentary, but it’s appropriate to say that much of the Wall Street doom and gloom has subsided early this year. The economic indicators are again largely moving in the right direction (except in Europe), and a healthier consumer should be beneficial to direct selling sales. Of course the long-held question arises: Will falling unemployment impact direct selling distributor growth? While there is likely some correlation as historical data would suggest, we don’t suspect that modest improvements in employment in the U.S. are going to have a significant impact, and any impact is likely offset by the improved consumer spending outlook. Net, net, direct selling isn’t counter-cyclical, in our opinion. It simply has some offsets through a combination of providing supplement income and the need to tap consumer spending. The combination should limit downside in tough times and normalize growth vs. other consumer sectors.
The direct selling sector has had some considerable activity over the last month. Most notably, Avon Products has been in the press daily given the unsolicited acquisition bid by global beauty company Coty, which was subsequently rejected by Avon’s Board, and the more recent announcement that Avon has tapped Johnson & Johnson executive Sherilyn McCoy as its new CEO. While the impact of a new CEO will take time to materialize—although we suspect the conclusion of the search and uncertainty is itself a positive—the impact of the Coty bid on the broader direct selling sector can be considered. Some have seen the large acquisition offer for a direct seller by a strategic industry participant as the establishment of a precedent for increased strategic acquisition activity within the direct selling channel. We don’t believe this is necessarily the case as Coty’s bid is, at a minimum, opportunistic given the depressed valuation of Avon currently. However, we do believe that the Coty interest in Avon demonstrates that there is some strategic interest from traditional branded industry participants on top of the growing financial buyer interest in the direct selling channel. These buyers are more likely to be opportunistic than seeking to acquire the high-momentum publicly traded direct sellers that already enjoy strong investor interest. Nonetheless, there is some interest.
Beyond Avon, investor attention has been focused on sales and earnings trends across the direct selling sector, and the trends exiting Q4 were generally favorable for the majority of the larger publicly traded direct sellers. As April progresses, first quarter results will drive the shares, but the stakes are now higher given the strong performance of share prices year-to-date. Sales and earnings momentum must continue for the strong stock performance to continue. Given the economic backdrop and our access to the trends of the publicly traded direct sellers, we suspect trends are at least modestly improving across the sector—of course not all direct sellers are participating in the growth.
Scott Van Winkle is a Managing Director of Equity Research at Canaccord Genuity, the global capital markets division of Canaccord Financial. Canaccord Genuity offers institutional and corporate clients idea-driven investment banking, research, sales and trading services from 20 offices worldwide. Van Winkle, based in Boston, has followed the direct selling channel since 1997.
Disclaimer: Canaccord Genuity has published research recommendations on Herbalife, Nu Skin Enterprises, USANA Health Sciences and Medifast and makes a market in shares of Herbalife, Nu Skin Enterprises, USANA Health Sciences and Medifast. Canaccord Genuity has provided non-investment banking securities-related services to Nu Skin Enterprises and Reliv International in the last 12 months. Past performance is not indicative of future results and these comments are not a recommendation to buy or sell the specific securities discussed.