USANA Health Sciences [Part 1]: An Almost Perfect Business Environment

USANA Health Sciences [Part 1]: An Almost Perfect Business Environment

This is part one of a multi-part series on USANA Health Sciences, Inc. (NYSE:USNA).

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USANA Health Sciences, Inc. (NYSE:USNA) is a consumer good company. The company manufactures, distributes and sells personal care products worldwide. Specifically, USANA is active in the nutritional product space. The company sells such items as multi-vitamins and meal-replacement shakes.

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Before beginning my career in finance, I worked for a brief period as a personal trainer, which gave me some insight as to how the market for these products, especially nutritional products and meal replacement shakes works. Key ingredients for these products are usually standard across all brands and in most cases, these key ingredients, such as whey protein, are manufactured within one facility, which then supplies many different nutritional companies. As a result, economies of scale are huge and key ingredients are cheap and plentiful.

The other factor that works in favor of companies active in the nutritional product market is the monopolistic/cartel pricing style of the industry.

Companies sitting on higher prices, for now

Indeed, when it comes to sports and nutritional products such as, multi-vitamins and meal-replacements, there is a belief amongst consumers that a higher price is better. Do a few minutes of research and you’ll find that the prices of these products vary significantly for what is, if you know what you’re talking about, all the same product just blended differently. You will pay a similar amount for a similar product, no matter which supplier you purchase it from. Actually, many companies selling theses nutritional products could slash their prices, sparking a price war, but so far this has not happened.

Yes, there are low cost, own-brand products on offer but due to the ‘a high price it better’ mentality and high level of customer loyalty, nutritional product companies tend to be highly profitable and almost untouchable.

USANA Health works with what amounts to franchise model

But what about USANA? Well, USANA Health Sciences, Inc. (NYSE:USNA) uses a multi-level marketing structure, or MLM. (This is a similar to the business model used by Herbalife Ltd. (NYSE:HLF), but we will leave out the pyramid scheme debate for the purpose of this article.) Now, USANA uses a binary compensation plan, where by the company pays its representatives based on the sales they generate, representatives also set the retail price on USANA Health Sciences, Inc. (NYSE:USNA) products they sell and the difference between the retail price and the ‘preferred price’ is what the representatives keep as pay. So, there is an incentive for representatives to sell more product. Representatives are also liable for the selling costs in their region; this is essentially a franchise model.

The combination of all the factors listed above, a driven sales team, high customer loyalty and low production costs create an almost perfect business environment for USANA.

Actually, if we look at the numbers we can see how USANA Health Sciences, Inc. (NYSE:USNA) makes its money. For example, the company’s reported a gross margin of 82% for fiscal 2012, up 3% from 2010. However, selling costs, related to the company’s MLM structure are high and impact USANA’s bottom line. What’s more, like all wellness brands, USANA Health Sciences, Inc. (NYSE:USNA) relies on a number of sponsorships to drive brand growth and loyalty, which can be an expensive pastime. Still, USANA’s EBIT margin is not unimpressive, coming in at 15% for fiscal 2012, once again, up from 11.6% reported for 2010.

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Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. Prior to his investing and writing career, Rupert began his career as a proprietary currency trader. Rupert holds qualifications from the Chartered Institute For Securities & Investment and the CFA Society of the UK. Rupert covers everything value investing for ValueWalk and co-runs HiddenValueStocks with Jacob Wolinsky Email -
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