Nu Skin Enterprises, Inc. Earnings Report Raises Red Flags

Nu Skin Enterprises, Inc. Earnings Report Raises Red Flags

Nu Skin shares plunged after the company’s latest earnings report, falling as much as 10.44% today to $53.08 per share. Wall Street was apparently unhappy with management’s weak guidance and concerned about the company being embroiled in an SEC investigation. Last night’s disclosure backs up a report we heard in November that Nu Skin had an undisclosed SEC probe going on at that time.

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Nu Skin earnings miss estimates

Nu Skin posted revenue of $543 million and earnings of 72 cents per share, excluding the devaluation of the Venezuelan bolivar. Reported earnings were 60 cents per share. The consensus estimate was 73 cents per share in earnings, excluding items, and revenue of $550 million in revenue.

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The company also reduced its guidance for full year revenue by about 2% and earnings by about 5%. Management cut guidance because improvement in China, which made up 37% of Nu Skin’s sales in the first quarter, was moving slower than previously expected. The company recently resumed business activities there after Chinese officials investigated its business in the early part of last year.

Canaccord trims Nu Skin price target

Canaccord Genuity analysts Scott Van Winkle and Mark Sigal have cut their price target on Nu Skin from $60 to $56 per share and maintained their Hold rating on the stock. Although their model hasn’t changed much, they expected shares to move lower due to headline risk in connection with the disclosed SEC investigation.

They said it appears as if sales and distributor trends in China are stabilizing, but it looks like it will take time for the company to pick up momentum. They think the worst is now behind Nu Skin but are waiting to see proof that the business is accelerating in China before becoming more constructive on the company.

Deutsche Bank analysts Bill Schmitz Jr. and Faiza Alwy also see “the potential of a sustainable, albeit more measured, penetration and launch strategy, especially in China.” In fact, they think there is “considerable” hidden potential in Nu Skin due to easy comparisons, conservative guidance and the launch of some essential oils later this year. They have a Buy rating and $68 per share price target on Nu Skin.

Is China really stabilizing?

Stifel analysts Mark Astrachan and Claire Chamberlin disagree with the Canaccord Genuity team in thinking that Nu Skin’s China business has stabilized. They said the weakening trends in China indicate that Nu Skin’s results haven’t fully stabilized and reduce visibility,” throwing into question the timing and level of the anticipated improvement in sales growth,” they wrote.

JPMorgan analysts John Faucher, Sofya Tsinis and Peter Grom were also disappointed with Nu Skin’s China results. They also mentioned a lack of visibility in terms of a turnaround in China, specifically pointing to management’s comments citing fourth quarter promotional activity as the reason for the sharp decline in distributor numbers.

They want to see an increase in sales leaders in China before they become comfortable with the thought that Nu Skin is turning things around in China. The JPMorgan team has a $60 per share price target and Neutral rating on Nu Skin.

Eyes on distributor numbers

The Canaccord team said that going into last night’s report, Wall Street was watching distributor numbers in China. Thy added that the numbers weren’t good enough to justify the stock’s rally since the release of the company’s fourth quarter earnings report. It had been expected that Nu Skin would see a sequential decline in the number of active associates.

However, it was worse than expected because the company lost as many associates as it had gained during the third and fourth quarters. The reason given was the end of a fourth quarter promotion which analysts said caused many associates to liquidate their inventory.

Nu Skin discloses SEC probe

Problems in China continue to plague Nu Skin, as the company disclosed that the Securities and Exchange Commission has begun a formal non-public investigation into a donation the company made in China in 2013. No other details were provided other than that Nu Skin plans to cooperate with the investigation. The JPMorgan team thinks it’s just too early to tell what will come of the SEC investigation but note that it certainly is a negative in the short term.

However, Stifel analysts believe the investigation is related to the possible FCPA violations and note that the probe could divert management’s attention away from trying to improve the fundamentals of the business. They also expect the investigation to continue being an overhang on Nu Skin stock “for the foreseeable future.”

This is apparently not a good time for multi-level marketing companies in terms of investigations, as Herbalife also disclosed a new probe in its latest earnings report this week. The nutritional supplements company reported in its 10-Q filing that the Dept. of Justice has been questioning some of its members.

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