Nu Skin Enterprises, Inc. (NYSE:NUS) posted first quarter 2014 results with sales and earnings above estimates, but for the first time guidance for the second quarter 2014 was below expectations. Also, there was no full year guidance from the company due to questions over its China business, although the company expects sequential sales growth improvement in 2014.Nu Skin Enterprises

Nu Skin might be following a conservative approach

Stifel analyst Mark S. Astrachan and Edward McPike, in a report issued on May 6, 2014, note that guidance given by the company for the second quarter is a bit disappointing, but management might have adopted a conservative approach as the company continues to accept applications for new sales people in China on May 1 and hosted corporate business meetings on April 19th.

The Stifel analysts lowered their 2014 and 2015 earnings per share estimates to $5.61 and $6.50, respectively, primarily due to lower sales in North Asia and Greater China. Organic sales for Nu Skin Enterprises, Inc. (NYSE:NUS) are expected to drop 1% year over year compared to a 12% rise previously, “reflecting less snap-back in distributor growth in China post investigation and reduced TR90 expectations.”

Watchpoints moving forward

According to analysts, numerous “watchpoints” may force Nu Skin Enterprises, Inc. (NYSE:NUS) to face other issues, even as the company recovers from the heightened regulatory and media scrutiny in China.  Some of the “watchpoints” include:

First, a launch of the company’s weight management system, TR90 did not garner much attention as was expected. The company stated that it will offer training to more distributors, and plans to change the product’s roll out schedule for better performance.

Second, the executive distributor growth in China, which is a vital indicator of sales, dropped 49% sequentially. Executive distributors in China refer to those who have become sales leaders and are recruiting and building sales network. The growth in executive distributors declined 49% sequentially, but increased 41% year over year. According to the analysts, the decline was mainly caused by increased regulatory and media scrutiny.

Third, inventories surged substantially year over year. In the first quarter of 2014, inventories surged 175% year over year and 21% sequentially. This indicates that the regulatory issues were unexpected and negatively affected short-term demand. Cash and equivalents dropped 43% sequentially to $285 million. Analyst note that the poor performance of TR90 also added to the rise in inventory. Nu Skin expects the inventory and related cash balances to improve through 2014.

The Stifel analysts have assigned a Hold rating on Nu Skin Enterprises, Inc. (NYSE:NUS).