April 01, 2017
The Winds of Change
by Douglas M. Lane
My equity research firm focuses on companies that employ the direct selling business model. I believe this model supports many favorable macro-trends such as leveraging technology to advance social selling and the move towards shopping away from a fixed retail location.
Last year saw some heightened regulatory scrutiny of MLM firms, particularly for Herbalife and privately held Vemma, both of which saw investigations by the Federal Trade Commission, and ultimate settlements. But things have changed, and it’s a new year.
Herbalife management expressed confidence on its Feb. 23 conference call that it can meet its new compliance mandates in time for the May 2017 deadline. If the company can continue to grow in the U.S. and globally under the new more restrictive regulatory framework then it will already be where the regulatory environment may or may not go for MLMs as a whole going forward. For the record, I had previously disclosed in the Jan. 4, 2013, Direct Selling News online edition that I owned Herbalife stock, and I still do today.
Fourth Quarter Results: Nothing to See Here
The fourth quarter 2016 earnings season for the five largest publicly traded direct seller companies (Herbalife, Nu Skin, Tupperware, Avon and USANA, each of which is over $1 billion in equity market capitalization) is mercifully behind us. Each stock dropped on the 4Q news. There were broad signs of deceleration judging by weaker rep and volume growth reported for the 4Q than we saw in the 3Q, so investor expectations obviously needed to be reset.
Foreign currency exchange continues to be a drag on these global companies as well, taking nearly a quarter of a billion dollars out of net income in 2016 combined for the five large companies mentioned above. The dollar is poised for its sixth consecutive year of appreciation in 2017 versus most major global currencies.
Changes, Changes Everywhere
Each of the five largest publicly traded direct sellers is in the process of undergoing management transformations at the top.
Avon announced in December that it hired London-based Jamie Wilson, a veteran traditional CPG executive as its new CFO; current CFO and COO Jim Scully is expected to step down at the end of the year following a transition.
In September, Tupperware promoted Patricia A. Stitzel to President and COO, apparently tapping the experienced Tupperware veteran as the heir apparent to Chairman and CEO Rick Goings, although no timetable for succession has been articulated.
And remarkably, after a period of relative senior management stability for most of the larger direct selling companies, in the 4Q alone three CEOs announced they were stepping down. Michael Johnson of Herbalife will transition out of the CEO role into a role of Executive Chairman effective June 1, 2017, and Truman Hunt is leaving as CEO of Nu Skin. Dave Wentz will be resigning as Co-CEO of USANA, leaving Kevin G. Guest as sole CEO.
Douglas M. Lane, CFA, is a securities analyst and is launching a boutique equity research firm focusing on the direct selling business model.