January 01, 2018
Q3 Review: Performance Still Mixed But Better Than Q2
by Douglas M. Lane
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 runs Lane Research, a boutique equity research firm focusing on those companies. His website is www.laneres.com.
The third-quarter earnings cycle for the four publicly traded direct sellers based in the United States, which appear on our index, continued to be spotty, but did show some sequential improvement from second-quarter results. Those companies in our index are Herbalife Ltd. (HLF), Nu Skin Enterprises (NUS), Tupperware Brands Corp. (TUP) and USANA Health Sciences (USNA).
In looking at organic sales growth, which is sales growth excluding acquisitions and the impact from foreign currency exchange rates, on average the group declined by 1 percent in the third quarter, a modest sequential improvement from a 2 percent decrease in the second quarter. And unlike the second quarter, when each of the four companies showed meaningful sequential deceleration from the prior quarter, organic sales growth rates showed sequential improvement or stayed the same for three of the four companies in the index, with only Herbalife showing a modest deceleration from a 3 percent decrease in the second quarter to 4 percent decrease in the third quarter. We view the third quarter as a stabilization quarter, with our outlook continuing to expect an overall underlying improvement once fourth quarter results are reported.
USANA continues to show the best momentum, leading the group with a 3 percent jump in organic sales growth for the third quarter. However, recent growth rates at USANA pale in comparison to the strong double-digit growth rates the company posted over the past couple of years. The launch of its new skincare line Celavive and European expansion—both announced at its recent convention—coupled with the renewal of its food line, could portend continuing improvement in growth rates throughout this year.
Tupperware also posted positive organic sales growth in the third quarter, with a 2 percent jump, in line with the second quarter and the 45th consecutive quarter of positive organic growth for the company. Once again, emerging markets led the way, growing 3 percent and accounting for 71 percent of total company sales in the quarter. The company’s restructuring plan announced in conjunction with its second-quarter release remains on track, which we believe will result in better profitability this year than is currently expected by investors.
While Nu Skin’s organic sales showed modest sequential improvement with a 6 percent drop in the third quarter, it was still the weakest performer in the group as the company cycled large Limited Time Offers (LTOs) for its AgeLoc Me and AgeLoc Youth products in the year-ago second quarter and third quarter, which made for difficult comparisons. However, going forward, with the launch of its LumiSpa treatment system coupled with a broad array of lower-priced new products to support its movement towards social selling, and having no LTOs last year in the fourth quarter to distort the comparisons, we look for a sharp acceleration in underlying momentum for Nu Skin beginning in the fourth quarter this year.
Past 4 quarters organic sales growth
Source: Company reports, Lane Research estimates.
Herbalife was the only company showing sequential deceleration in organic sales growth, down slightly by 4 percent in the third quarter versus 3 percent in the second quarter. However, management indicated on its conference call that it believes business has stabilized, and that 2017 was a transition year as the company went to great lengths to comply with the 2016 Federal Trade Commission settlement in the United States and to re-accelerate growth in China. Those two markets account for about 40 percent of sales. With the FTC compliance now in place and new management in China, the company looks for underlying trends to improve going forward, and in fact organic sales growth could return to positive territory as soon as this quarter.
For the first time in recent memory, foreign currency exchange rates were insignificant in the third quarter, within 1 point above or below flat for all five companies in our index. We continue to look for exchange rates to turn largely favorable in the fourth quarter, even with the recent rebound in the dollar.
Among the large publicly traded direct sellers overseas, Avon Products (AVP), based in London, showed third quarter organic sales flat versus being down by 4 percent in the second quarter. With other momentum indicators either flat (active representatives) or improving modestly (unit volumes), perhaps the third quarter was an early sign of stabilization for the company. However, with a new CEO yet to be announced and the current management acknowledging it won’t hit most of its financial targets this year, the outlook remains tentative.
Brazil-based Natura grew organic sales by 5 percent in Brazil and by 19 percent elsewhere in Latin America in the third quarter. Sweden-based Oriflame grew organic sales by 11 percent company-wide, so both foreign-based direct sellers outperformed the U.S.-based companies in the third quarter on the top line.
Unique Insight into Tupperware’s Americas Business Composition
By breaking out the BeautiControl numbers in conjunction with that division’s closure this year, Tupperware management has provided unique insight into the composition of its businesses throughout the Americas, which account for approximately 40 percent of total company pro-forma sales in 2016, the last full year of reported numbers for Tupperware. Sales by division in the Americas are broken down in the pie chart on this page.
While Mexico is the largest country accounting for about one-third of total sales in the Americas for Tupperware, that is split about evenly between the Tupperware Mexico and Fuller Cosméticos divisions. Tupperware Brazil is the largest single division with 30 percent of the Americas sales. While you would expect Brazil to be larger than Mexico given its larger population and GDP, even on a per capita consumption basis Brazil is slightly higher than Mexico for Tupperware products despite Brazil having an overall GDP per capita that is less than 80 percent that of Mexico.
Perhaps most interestingly, Tupperware Canada sales are nearly 40 percent of those for Tupperware U.S. despite Canada overall having only 10 percent of the population and 10 percent of the GDP of the United States, meaning the per capita consumption for Tupperware in Canada is four times that of the United States, which seems like an unusually large gap in the consumer packaged goods space, in our experience.
Among its four largest markets in the Americas, we calculate that per capita consumption is highest in Canada at $1.89, followed by Brazil and Mexico at $1.25 and $1.18 respectively, with the United States meaningfully lagging at 48 cents.
TUPPERWARE AMERICAS BREAKDOWN 2016 EXcluding BEAUTICONTROL
Source: Company reports and Lane Research estimates Americas are 40% of 2016 Global Sales Excluding BeautiControl
The analyst, 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 research report. 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.