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Fallout in China from Nu Skin affair depresses Usana's Q2 results

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By Hank Schultz

01-Aug-2014

Usana Health Sciences reported flat net sales  in the second quarter of its 2014 fiscal year.  Issues in China caused the company to miss analysts’ estimates for sales and earnings, and the company’s share price took a plunge as a result.

 

Usana’s issues in China revolve around fallout from an enforcement action taken againts NuSkin Enterprises, which, like Usana, is a multilevel marketing company with significant operations in the country. The regulation of network sales in China is complex, with companies needing to have numerous regional offices as putative places of business in order to be in compliance. These regulations allow limited forms of direct selling but prohibit schemes in which members make more money from recruiting additional members than they do from actual product sales.  Regulators fined Nu Skin $540,000 and fined six sales members a collective $241,000.  The fines, at least for the company, were paltry, but the affect on that company’s stock price and business (and Usana’s business) was far greater.

Company's biggest market

Usana gets 39% of its total revenue out of China, and the company had slowed down operations there while waiting to see how the Nu Skin situation would pan out. Sales in China decreased year over year, but CEO David A Wentz said the effect is expected to be temporary.

“Last quarter, our results were impacted by the media and regulatory focus on companies in our industry in China. While that impact certainly carried over to the beginning of the second quarter, our business in China began to accelerate as the quarter progressed,” Wentz told analysts during a conference call that was transcribed on the site seekingalpha.com

 Wentz said the country is key to Usana’s future, and the company is investing heavily there.  In addition to renovating sales centers, the company also broke ground on a $40 million production facility in Beijing during the second quarter.  Wentz said he expected sales in China to recover their previous robust pace as the year progresses.

“As far as the activity in China, we have a very strong team over there that immediately when those kinds of things happen, they get out to the field and help them to focus on the business and not the garbage that is in the media. We also proactively reach out to regulators and to our employees to make sure everybody's getting accurate information,” Wentz said.

Another factor that continues to affect Usana’s results in the region is an internal accounting change in which the company mandated that products purchased in one country must be distributed in that country.  There had been a lot of cross-border activity between mainland China and Hong Kong prior to this change because Usana’s products were cheaper in Hong Kong.  There was a $7 million bump in sales in Hong Kong prior to the change going into effect, and sales declined there after the deadline.

Earnings details

As far as the numbers nitty-gritty is concerned, Usana presented a mixed picture.  The company reported $188 million in revenue in the quarter, compared to $189 a year previously. Analysts had been expecting $198 million. Earnings per share came in at $1.36, with analysts having projected $1.50.  Sales overall were flat, but declined in the company’s most important markets.  Sales dropped by 4.3% in the all-imporant Chinese market and declined 4.6% in the United States as well. Still, with the expected rebound in China, Usana management reiterated its earnings guidance for the year.  The company is projected to post sales of between $770 million and $790 million and earnings per share of between $5.50 and $5.65 for the full year.

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