Sector financial performance:

This company primarily manufactures dietary supplements. Because it distributes their products as a form of direct selling and thus present similar trend with other direct selling companies, we have grouped it into nutritional supplement – direct selling sector in natural food industry. However, because its products are different to a large extent with other nutritional supplements products, we see its different performances in Asia area.

Our company data indicate that, in this direct selling nutritional supplements sector, the growth in sales, as compared vertically, basically has a direct relationship with the sales force (re-sellers). The key to attract more re-sellers is certainly related to brands’ realization, but it is, to much larger extent, determined by incentives/commissions/availability of sales force and employment rate. This is particularly true in matured markets such as Western Europe, North America, South America, and Japan, where the total numbers of active sales force are fixed.  As our data indicate, the sales have been flat for dietary supplement products in those markets for years. However, sales in developing market seem to have been decreasing until 2018 where we have seen strong growth in international market probably as a result of increased incentives. This is obviously different with what have been happening in nutritional supplement market where immature markets and consumers have already become the major driver for profit growth. It may be because the science concept behind dietary supplements is not as easy to be accepted as VMS products in developing market.

As direct selling company, high gross margin is major characteristic of this sector. The typical gross margin for company in this sector is around 83-85% with 49% commission as percentage of sales and 27% SG&A as percentage of sales. Therefore, they usually have operating margins of 9%. However, both gross margin (83% in 2018) and operating margin (5% in 2018) has decreased in 2018.

According our analysis, a typical ratio of enterprise price/adjusted EBI is about 30 with interest/EBITDA ratio of 4%. 

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Company performance:

The sales performance has been closely related to the number of sales force (distributors in this case), which is significantly influenced by incentives. Sales continued to decrease in US market but jumped in 2018 driven by strong increase in international market.  

For first quarter of fiscal 2019 compared with same period of 2018 (ended 20180930)

Organic net sales increased about 12% primarily attributable to an increase in all regions except for Japan.

For fiscal 2018 compared with 2017 (ended 20180630)

Organic net sales increased about 1.8% primarily attributable to an increase of 6% in international market offset by decrease of 1.7% in US market.

Organic net sales decreased 4.5% in fiscal 2017 compared with 2016, primarily attributable to a decrease of 4.7% in US market offset by an increase of 0.7% in Asia.

Organic net sales increased 9.5% in fiscal 2016 compared with 2015, primarily attributable to the increase of 10.5% in US market offsetting by a decrease in Asia market.

Organic net sales decreased 8.5% in fiscal 2015 compared with 2014, primarily attributable to the decrease of 7% in Asia and the decrease of 1.5% in US market.

This company’s gross margin seems to have been decreasing in the past three years down to 83% in fiscal 2019 as a result of increasing operating expenses. Unexpected increase in SG&A as percentage of sales in fiscal 2017 dragged down this company’s operating margin to 2.2%. However, it rebounded back to 5% in 2018. Operating incomes continued to go down in 2015/16/17 due to shrinking sales and margins and increased commissions but jumped in 2018 based on the same reasons.

Stock price

This stock currently has an enterprise price/EBI ratio of 30 ($14/share), which we think, is relatively overvalued.