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April 01, 2016

Financial News

Public Companies: Analysis of Year-End Performance

by Andrea Tortora

Fluctuating foreign exchange rates, a strengthening U.S. dollar and economic and political headwinds in global markets combined for disappointing fourth quarter and 2015 year-end results for six leading direct selling giants.

Revenues dropped at Avon, Nu Skin, Herbalife, Tupperware, Medifast and Nature’s Sunshine, with four of these companies seeing double-digit declines:

  • Avon: Full-year revenue (excluding the North America business) decreased 19 percent to $6.2 billion; fourth-quarter revenue dove 20 percent to $1.6 billion.
  • Nu Skin: Full-year revenue dropped 13 percent to $2.2 billion; fourth-quarter revenue slumped 6 percent to $572.2 million.
  • Tupperware: Full-year revenue slid 12.4 percent to $2.3 billion; fourth-quarter revenue fell 13 percent to $592.1 million.
  • Nature’s Sunshine: Full-year revenue slipped 11.4 percent to $324.7 million; fourth-quarter revenue declined 7.7 percent to $80 million.
  • Herbalife: Full-year revenue is down 9.9 percent to $4.5 billion; fourth-quarter revenue dropped 3.1 percent to $1.1 billion.
  • Medifast: Full-year revenue slid 4.4 percent to $272.8 million; fourth-quarter revenue fell 2 percent to $61.3 million.

This marks the fifth consecutive year of a downward trend for Tupperware (TUP—NYSE) and Avon (AVP—NYSE), whose sales volume has slipped 30 percent since 2010. For Nu Skin (NUS—NYSE), the latest results represent a 30 percent decline since a sales peak of $3.2 billion in 2013.

Yet there is good news. Three companies posted revenue gains in 2015:

  • NHT (Natural Health Trends Corp.): Full-year revenue shot up 113 percent to $264.9 million; fourth-quarter revenue jumped 108 percent to $73.7 million.
  • USANA: Full-year revenue grew 16.2 percent to $918.5 million; fourth-quarter revenue went up 2.1 percent to $232.6 million.
  • Primerica: Full-year revenue increased 5.2 percent to $1.41 billion; fourth-quarter revenue gained 2.5 percent to $354.1 million.

While revenue was down overall at weight-loss and healthy lifestyle company Medifast (MED—NYSE), it is a bit of a hybrid company. The Take Shape For Life direct sales business unit grew 5 percent in the fourth quarter to $48 million. This is of note because Take Shape For Life accounts for $202.1 million (or 74.1 percent) of Medifast’s 2015 net revenue of $272.8 million.

Initiatives are underway at all of these businesses to revive performance and stimulate sales. Programs include cost-cutting measures to allow for reinvestment into the business, a streamlined and more competitive focus on products and marketing, and stock buybacks that boost earnings per share and shareholder value.

One example: Medifast will spend $1.4 million in restructuring costs to pay for separation agreements for several senior executives. It expects the changes to result in an annual savings of $2.3 million, says Michael MacDonald, Chairman and CEO.

ECONOMIC MODELING

To ensure a power position, industry watchers say companies should start running through scenarios to tackle several potential assaults on their business base. Here’s what company executives can expect:

Continued market volatility, both in currency exchange rates and in geopolitical shifts, such as economic slowdowns in China and the EMEA countries of Europe, the Middle East and Africa.

More competition in specific countries from local businesses that make, market and distribute similar products.

Shareholder expectations for a stock repurchase to improve earnings per share.

Overall, the outlook remains bright for the $40 billion U.S. direct selling industry, says a market research report from IBISWorld. The provider of business intelligence says revenue will jump in part because Americans who lost their jobs in the wake of the recession established direct selling businesses as a way to earn income. “In the five years to 2020, the industry is expected to continue to grow, driven by improved consumer confidence and disposable income,” IBISWorld writes.

EVER-CHANGING EXCHANGE RATES

The strongest direct selling companies have a game plan for tweaking their operations when the dollar is moving up and when it is moving down, says Scott Hammond, Ph.D. Hammond is a clinical professor of management at the Jon M. Huntsman School of Business at Utah State University, who consults with many direct selling companies.

“There is no steady state in the economy, so companies need to find a way to make money regardless of how currency is moving,” Hammond says. “The better firms have diversification in their products and markets to take advantage of when the dollar is moving in both directions.”

Executives from nearly every company, even those making gains, point out the impacts of currency exchange rates. In some cases, companies that show a loss in general sales revenue actually grew on a constant-currency basis. In other words, if the value of the dollar was the same in all markets, or if revenue were recorded in “constant dollars,” direct sellers would not be posting such big drops.

Here’s a sampling: Beauty, personal care, jewelry and fashion company Avon says that without the impact of foreign exchange rates, quarterly sales would have increased by 3 percent in constant dollars.

Tupperware, whose brands include food preparation and storage plus beauty and personal-care products, says fourth-quarter sales were up 2 percent in local currency but down 13 percent in dollars.

At nutrition and weight-management firm Herbalife (HLF—NYSE) total volume points would have grown 5 percent in the fourth quarter without the negative impact of foreign exchange fluctuations.

Nu Skin, which makes anti-aging and nutrition products, says revenue grew on a constant currency basis but was negatively impacted by 7 percent or $42 million in the fourth quarter. Full-year revenue suffered an 8 percent loss attributable to foreign currency variations. Nu Skin Chief Financial Officer Ritch Wood says the company expects another 7 percent hit in 2016 thanks to the strengthening dollar.

Nature’s Sunshine (NATR—NASDAQ) provides natural health and nutrition supplements. The company says its full-year net sales revenue was negatively impacted by $16.7 million due to unfavorable foreign currency exchange rate fluctuations. It also reported a $22.9 million decline in net sales in the NSP Russia, Central and Eastern Europe segment. For the fourth quarter, revenue took a $3.8 million hit from exchange rate volatility.

Primerica, which offers insurance and financial services, and USANA, a provider of nutritional and nutraceutical products, also note downward pressure from currency fluctuations.

Primerica (PRI— NYSE) says a weakened Canadian dollar impacted 2015 net operating income by $7 million year-over-year.

USANA (USNA—NASDAQ) says changing exchange rates negatively impacted earnings per share by an estimated 92 cents. Company executives expect a stronger U.S. dollar to reduce sales by $54 million in 2016.

COMPLEX FLUCTUATIONS

The full impact of fluctuating exchange rates is complex. For example, many companies are posting sales drops while seeing an increase in the number of active sellers. Others deal with a large active seller base, but smaller order sizes in specific countries. Tupperware, for example, reported more active sellers with lower sales in Asia Pacific, where it noted a shift to its beauty segment, which has lower than average order sizes.

Companies that do business in Asia, especially in China, where the economy has slowed, may see sales volume remain high while revenue dips. This is often due to a shift in product preference to less expensive items.

Finally, companies may begin to lose business to native-born competitors who are now more sophisticated when it comes to marketing. Hammond recently spoke with several direct selling firms battling this phenomenon, such as a distributor of household goods that is losing business in Eastern Europe to a locally owned company that entered the market selling similar products.

“The rise of local competition is something that in the next 5 to 10 years will have a huge impact,” Hammond says. “The only way you can deal with that is to try to compete.”

STOCK REPURCHASES

One action companies often take to smooth out erratic changes in market economics is a stock buyback or repurchase. The strategy is a way for a company to invest in itself. When a company absorbs shares, the number of outstanding shares on the market is reduced. This increases the ownership stake of each investor.

A stock repurchase bolsters a falling stock price. By buying up shares, a company sends a positive message to Wall Street, essentially saying that it believes the market went too far in discounting the shares. Finally, a stock buyback often lowers the price-earnings ratio, which the market thinks is a better sign of value.

The strategy is alive and well for companies with revenue gains and losses.

Chris Sharng, President of Natural Health Trends Corp. (NHTC—NASDAQ), which makes wellness, beauty and lifestyle products, says his team is diligently working to defend the company. A triple-digit increase in revenue and net income provides the opportunity to spend $55 million in capital on repurchasing shares. “Our Board of Directors strongly believes [this] is an attractive investment,” Sharng says, adding the board’s authorization of the move “underscores their confidence.”

Nu Skin President and CEO Truman Hunt said the company repurchased $60 million in outstanding shares in the fourth quarter. For the year, Nu Skin repurchased more than 5 percent of its outstanding shares.

Nature’s Sunshine repurchased $6.6 million of common stock during fiscal 2015.

At USANA, share buybacks in 2015 led to a 28.2 percent increase in earnings per share to $7.18. The company plans to continue its stock repurchase program in 2016.

Ongoing share repurchases at Primerica helped drive a 12 percent increase in diluted net operating income per share to $1.01. In 2015 Primerica boosted its share repurchases by $50 million to $200 million, which enabled the retirement of 8 percent of the company’s common stock.