USANA Health Sciences (USNA) is under heavy pressure this morning after delivering poor guidance last night. The company expects Q2 EPS of just $0.91-0.95 and revenue of $253-256 mln. While there is not a lot of sell side analyst coverage on the name, these results are well below consensus.
USNA sells nutritional, personal care, and weight management products. However, unlike most consumer product companies, it does not sell its products via typical retail channels. Instead, it uses a direct selling method carried out by independent distributors.
This is also known as multi-level marketing (MLM). Basically, this means that people selling the company's products get compensated two ways: via normal selling to customers and by getting a slice of the commission for people working under them.
This configuration has generated criticism from short sellers questioning the accounting involved, and some argue that this structure could be manipulated and may not accurately reflect end demand as some distributors may be storing lots of product to meet compensation incentives. Another concern, and one that USNA readily admits, is that this model has a high turnover among new Associates and Preferred Customers.
Another wrinkle in the story is that USNA is based in Utah, but Asia Pacific has driven much of USNA's growth the last several years, led by China, which accounts for 50% of sales. USNA is citing a difficult environment in China for the shortfall. USNA says that it has been hurt by "negative media coverage of the health products and direct selling industries in China." Furthermore, USNA says that sales may be soft in China throughout 2019, which caused the company to lower its full year guidance.
Briefing.com has been cautious on direct selling companies like USNA for some time. The compensation structure, combined with high exposure to China, creates a good deal of risk with these types of companies. We would avoid going value shopping down here even with the stock sharply lower today.
On a final note, we would also be cautious on Nu Skin (NUS), which sells personal care products (creams, cosmetics, gels, lotions) and has a nutrition segment (mostly nutritional supplements). NUS also uses a person-to-person, direct marketing model and has high exposure to Asia. Herbalife (HLF) is another direct marketing company that we would be cautious on, as 42% of its net sales come from Asia Pacific, including 21% from China alone.