Nu Skin Enterprises, Inc. (NYSE:NUS) filed its long-awaited 10K after the close. Although the company provided some incremental color regarding the investigation of its business in China, it did not announce any new policies/actions in the region, as the investigation is still ongoing. We think the stock will continue to be volatile in the near term until a resolution is reached, but we expect Nu Skin Enterprises, Inc. (NYSE:NUS) to emerge relatively unscathed.
- Chinese regulatory agencies appear to be focused on a few allegations from the January 2014 article by the People’s Daily. These include the company’s “marketing claims and the structure of [their] sales organizations and compensation and whether they violate applicable Chinese regulations.”
- NUS indicates a fine is likely, which is what we have said all along. The 10K states “it is likely that we will be fined and could potentially face some other form of sanctions from these regulators. These other sanctions could include a formal suspension of our ability to recruit new sales people and direct sellers, a temporary suspension of our ability to sell products in various markets or, in the most extreme cases, loss of existing licenses to operate in various jurisdictions in Mainland China.” At this point it is tough to predict what the potential magnitude of a fine would be, but we think that would be the best case outcome for the company, as it will signify a closure of the process. According to the 10K, it does not seem Nu Skin Enterprises, Inc. (NYSE:NUS) has accrued for the potential fine/sanctions. The company has a net cash position of about $343M US, so we do not expect any problems related to a fine.
- Stores represent a bigger portion of Nu Skin Enterprises, Inc. (NYSE:NUS)’s business in China and we are encouraged by the commentary that the company intends to continue to expand on that front. They also indicated that they “currently have very few direct sellers in Mainland China, but…are in the process of expanding this aspect of [their] business.” We believe that direct selling accounts for less than 10% of NUS’s business in Mainland China. The company indicated they may need to write off inventory in Mainland China, as it was based on their initial growth plans for the region, which were put in place before the investigations were announced. We believe this is already in the Q1 guidance.
- No change in Nu Skin Enterprises, Inc. (NYSE:NUS)’s practices in Mainland China. Since the company is undergoing internal investigation of its business in the region as well, they are still not holding any promo meetings or accepting applications for new reps. As a reminder, these are voluntary actions, which are hindering their growth in the near term. These were announced previously.
- We rate Nu Skin Enterprises, Inc. (NYSE:NUS) Overweight. We think the stock is attractive at current levels, assuming the China situation is resolved favorably. We do not see any reason to change estimates at this time, as we do not have any incremental data points.